Bankruptcy can be used to describe a federal court proceeding that assists consumers and businesses in repaying their creditors and getting rid of debts. The bankruptcy court will help you if you can prove you are entitled. Bankruptcies generally fall into one of two categories:
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- Liquidations (Chapter 7)
- Reorganizations (Chapters 11, 12 and 13)
The most popular bankruptcies for both individuals and businesses are Chapter 7 and Chapter 13. Chapter 7 bankruptcyes are usually in the liquidation category. This means that your property can be sold to repay your debts.
Chapter 13 bankruptcy filings fall generally under the reorganization category. This means that you can keep your property but must submit and follow a plan that will allow for you to repay all or some of your debts within three-five years.
Chapter 7 Bankruptcy 101
Individuals and businesses can file Chapter 7 bankruptcy. These proceedings usually last three to six months.
Some of your assets may be taken and sold in a Chapter 7 bankruptcy proceeding to repay some or all your debts. This is called “liquidation” of property.
As a benefit to this type of bankruptcy proceeding any unsecured debts (debts not secured by collateral) will be erased. You cannot also sell certain property to pay your debts. These include your furniture, your car and your clothes.
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In a Chapter 7 bankruptcy proceeding, secured debts are treated differently to unsecured debts. The Chapter 7 bankruptcy proceeding will require you to choose whether to allow the creditor to seize the property that secured the debt or continue making payments to the creditor. Some secured debts may also be extinguished during a Chapter 7 bankruptcy proceeding.
You must prove that you are eligible before you can file for Chapter 7 bankruptcy. You must have enough income to pay Chapter 13 bankruptcy repayments. To be eligible for Chapter7 bankruptcy, you must meet other requirements.
Chapter 7 Bankruptcy Does Not Pay Debts
Credit card debt, unsecured loans and other debts, such as child support, taxes due and alimony payments, can all be forgiven under Chapter 7. You can find out more about the debts that will still remain after a Chapter 7 bankruptcy proceeding at Debts That Remain After a Chapter 7 discharge.
Chapter 13 Bankruptcy 101
People with reliable income can file Chapter 13 bankruptcy. Also called the “wage earner” bankruptcy proceeding.
You must agree with the court to create a repayment plan for Chapter 13 bankruptcy. This plan will be followed for the next three to five year. The amount that you will have to pay depends on your income, how much you owe and what the creditors of your unsecured loan would have received if your bankruptcy had been filed under Chapter 7.
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To be eligible for Chapter 13 bankruptcy protection, you must prove that your debts are below the filing limits. You may not be eligible to file for Chapter 13 bankruptcy protection if you have more than one of these amounts.
Chapter 13 bankruptcy can allow you to pay off secured debts even if they are not being paid on time. It may be possible to include past due payments in your debt repayment plan, and then pay them off over several years.
Chapter 11 Bankruptcy 101
As a way to clear their debts and get their affairs in order, struggling businesses often resort to Chapter 11 bankruptcy proceedings.
Some people also file Chapter 11 bankruptcy if they aren’t eligible for Chapter 13 or have large amounts of nonexempt property (like multiple homes). Chapter 11 is more costly and takes longer to complete than Chapter 13.
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Chapter 12 Bankruptcy 101
Chapter 12 bankruptcy is similar to Chapter 13. However, it is not available for people who have debts from a family fishing or farm. For guidance, contact a bankruptcy lawyer if you are unsure about what is best for you.