What Are My Options For Filing Personal Bankruptcy?

Bankruptcy can trace its roots back to the United States Constitution and even to the Bible, according to some scholars. Individual consumers have the right to eliminate part or all of their debts when they can no longer afford to repay their creditors on current terms. Two primary types of personal or consumer bankruptcy relief are available:

1. Chapter 7, which is called a liquidation case; and
2. Chapter 13, which is called a reorganization case.

Chapter 7

This bankruptcy chapter permits personal debtors to discharge all or some of their debts. It is intended for those debtors who do not have the ability to repay their obligations. Under this chapter, a bankruptcy trustee will acquire possession of all of debtor's non-exempt property and assets. The applicable exemptions are usually determined by state law, although sometimes, federal laws may apply instead. There are exemptions for cash, savings, a residence, auto, family Bible and work tools, among other specified assets and property. The aim of a Chapter 7 bankruptcy is to receive a discharge of existing debts, so that a debtor might have a fresh start for rebuilding her financial future going forward. Chapter 7 may be the best option for a debtor who is able to repay her bills after dischargeable debts are eliminated from her plate. However, if a debtor has debts that are secured by property she wishes to retain or debts that are probably not able to be discharged, then a Chapter 13 plan may make more sense.

Chapter 13

This bankruptcy chapter is intended for those debtors who can repay all or some of their debts under a restructured plan. It is designed for consumers who have regular income sources but who are unable to repay their obligations in the short-term. These debtors would prefer to repay their debts in multiple payments over a longer period of time. A debtor is only able to file for Chapter 13 relief if her debts do not exceed jurisdictional limits for secured and unsecured debts in the United States Bankruptcy Code.

Chapter 13 debtors are required to file a plan with the Bankruptcy Court that will repay creditors some or all of the money owed to them. The plan period ranges from a minimum of three years to a maximum of five years if debtors are not repaying all of their debts. The debtor's plan requires court approval.

The primary advantage of Chapter 13 over Chapter 7 is that a debtor in a reorganization case can keep all of her property, whether exempt or non-exempt, as long as she keeps making timely payments under her bankruptcy plan each month. Once all of the plan payments are made, the residual debts that remain unpaid are discharged, aside from certain priority debts. This chapter is commonly filed by homeowners facing foreclosure on their residences.