The Types of Bankruptcy
If you’re filing for bankruptcy, your basic choice is between a bankruptcy that doesn’t involve any type of repayment plan (Chapter 7 bankruptcy) and one that does (Chapter 13).
Chapter 7 — straight bankruptcy: The belly-up version that most people envision when they hear the word bankruptcy. If you file under Chapter 7, most of your debts are eliminated, and some of your property may go to your creditors. You don’t have any repayment plan; your debts simply disappear.
To qualify for Chapter 7 bankruptcy, you need to jump these hurdles.
The Means Test involves a complicated set of calculations that identify those consumers who can pay a significant portion of their bills and should be required to do so instead of shedding all their obligations in Chapter 7.
Some judges consider whether you’re acting in good faith. They may ask whether your bankruptcy was necessitated by sudden illness, calamity, or unemployment; and whether you made unnecessary eve-of-bankruptcy purchases far exceeding your ability to pay.
Chapter 13 — debt repayment plans: In filing a Chapter 13 bankruptcy, you propose a debt repayment schedule, and for the next 36 to 60 months, you pay what you can afford.
Creditors usually receive only a small percentage of what they’re owed and typically must settle for pennies on the dollar. After that, you’re home free. Even if you can’t eliminate debts, you can still use Chapter 13 to keep creditors off your back while you pay them in full over three to five years.
Only individuals with regular income (no corporations, no partnerships) can file under Chapter 13. The source of your income isn’t important, provided it’s regular and stable. Your income can be wages, self-employment profits, unemployment benefits, or even assistance from friends and family.