Does Bankruptcy Erase All My Debts?

What are the different types of bankruptcy that apply to individuals? There are two, Chapter 7 and Chapter 13. You may have heard of Chapter 11 but that is for businesses not individuals.

Prior to October of 2005, going through a personal bankruptcy was a fairly simple and painless process. It did ruin your credit but it also allowed for a more liberal discharging of debt. In 2005, the law changed and is designed to provide an incentive to people to file under Chapter 13 rather than Chapter 7. For people with a steady income, Chapter 13 allows them to keep some property like a house or a car that they would otherwise lose in a Chapter 7 filing. Chapter 13 is a court approved “pay back” plan that can run for as long as five years.

Chapter 7 is sometimes refered to as a straight bankruptcy. Basically Chapter 7 requires the liquidation of all but a few work related assets like a vehicle used in work or tools etc. All other property will be sold or given to debtors as payment. The chapter also places a limitation on the amount you can earn during this process. The intent of the law is to insure the debtor does not profit by not paying his debts.

Another difference between the two is the amount of time that must pass before you can refile. With Chapter 7 the waiting period is 8 years. With 13 it is two years.

While there are some similarities in the types of debt that can be discharged through either Chapter 7 or 13, there will be some differences as well depending on the state where you file. Most unsecred debt, garnishments, foreclosure notices and collection calls can be discharged through bankruptcy. However, child support, alimony, fines, certain taxes and student loans cannot.

Chapter 7 is a straight liquidation. Chapter 13 is a pay back plan. However, unless your plan satisfies all of your debt over the term of the bankruptcy, the Court usually will not allow the debtor to keep property like a boat, time share, recreational vehicles and the like. These items must be sold to meet the requirement to pay all the debt within the scheduled time.

As part of the new law, persons seeking to file under either chapter have to have attended a government approved credit counseling course within six months of filing. The idea here is to try and solve the credit problem without taking legal action. The second major change just involves Chapter 7. Today you have to satisfy a “means test” to confirm your income does not exceed a certain amount. This amount will vary by state. You can find those limits here.

There are other strategies to settle your debt without going through bankruptcy. It all depends on your personal situation and what best makes sense for you and your family. Any decision to file for bankruptcy should not be made without consulting a qualified bankruptcy attorney.