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Declaring Personal Bankruptcy & Different Types



It's common for people to feel afraid of being bankrupt. But for many, filing for bankruptcy is an effective way to manage debt.

This article discusses things you should know about declaring consumer bankruptcy.

What Does It Mean to Be Bankrupt?

If you are over your head in debt and do not see a way to pay it off with your current level of income, then you may be bankrupt. However, before you take the steps to file for bankruptcy, you should first discuss your options with a bankruptcy lawyer.

Declaring bankruptcy can have long-lasting consequences. In some cases, you could still be in major debt even after filing for bankruptcy.

Types of Bankruptcy

There are several types of consumer bankruptcy, including:

  • Chapter 7 bankruptcy: Also known as liquidation, this is often the simplest form of bankruptcy. In Chapter 7, a court-appointed trustee takes a debtor's non-exempt property, such as investments, extra cars and furniture. The trustee then sells the property to pay back creditors. At the end of the Chapter 7 process, many of a debtor's debts are discharged, which means they are cleared.
  • Chapter 13 bankruptcy: This type of bankruptcy is for people who earn an income. It requires the debtor to come up with a debt repayment plan. This plan calls for the debtor to repay his creditors over a three- to five-year period.
  • Chapter 11 bankruptcy: This form of bankruptcy is relied on frequently by businesses. However, individuals who do not qualify for Chapter 13 can usually use Chapter 11 as an alternative.
  • Chapter 12 bankruptcy: This type of bankruptcy provides debt relief for family farmers and fishermen.

Debts That Remain After Bankruptcy

Although bankruptcy clears many debts, it does not clear them all. Debts that remain after bankruptcy include:

  • Student loans
  • Recent unpaid taxes
  • Criminal fines
  • Divorce property settlements
  • Alimony and child support

Bankruptcy Court

The U.S. Bankruptcy Courts handle consumer bankruptcies. Each state has at least one U.S. Bankruptcy Court. Some states have multiple courts. Talk to a bankruptcy attorney near you to learn where to file your bankruptcy case.

The Means Test

The means test determines whether someone qualifies for Chapter 7. The test was created to prevent abuses of the bankruptcy process.

The means test looks at your recent income and compares it to the median income of similarly-sized households in the state in which you live. If your income is greater than the median, the means test looks at how much disposable income you would have to put toward your debt. Disposable income is the amount of money you have left over after basic necessities are paid for.

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