It is a common misconception that if a person files for bankruptcy their house, car and the clothes off their back will be sold to creditors to repay debts. Frankly, this isn’t the case. Often times, a person will retain full possession of their house, car and family knick knacks while filing for bankruptcy.

In the United States, there are four types of bankruptcies a person or company can file. They are Chapters 7, 11, 12 and 13. The most common for individuals is Chapters 7 and 13. While Chapter 11 is usually associated with businesses, and Chapter 12 is specifically for farm owners.

Which chapter of bankruptcy a person qualifies for depends on a variety of variables. This is determined by a “means test,” which is a formula that includes a person’s income and their total amount of secured and unsecured debts. Income is determined by the average amount of money a person has made in the last six months. Secured debts are typically things like car loans or mortgages, property which has a lien on it. Whereas, unsecured debts usually consist of credit card or medical bill debts.

Chapter 7

When people say they are filing for bankruptcy, they are usually filing Chapter 7. This is the most frequently filed bankruptcy chapter. It is also known as a “liquidation” bankruptcy. Essentially, Chapter 7 liquidates all valuable property in order to repay the debts. The court appointed trustee will evaluate the value of a person’s assets then sell them off to repay creditors.

Trustees can not sell assets considered “exempt property.” Exempt property typically includes clothing, household furnishings, appliances, jewelry (up to a certain value), personal effects, like toothbrushes and electric razors, tools of trade or profession and certain amounts of equity acquired in a car or home.

It is not unusual for a trustee to determine a person filing for Chapter 7 does not own anything worth selling. Almost everything is considered exempt.

Ultimately, all debts are discharged for the exception of secured debts like car loans, mortgages, child support or student loans. Debt acquired through fraudulent or malicious means may not be discharged. The whole process takes about four to six months.

After settling a Chapter 7 bankruptcy, a person is not eligible to file bankruptcy again for eight years.

Chapter 13

Chapter 13 is the second most popular form of individual bankruptcy claims. This is sometimes called a “wage earner’s plan.” Unlike Chapter 7, a person filing for Chapter 13 agrees to repay all or some of their debt over the course of three to five years.

When a person files for Chapter 13, they must propose a repayment plan that details how and how much they are going to repay creditors over the course of the next three to five years. The minimum repayment amount depends on a how much a person earns versus how much they owe.

To qualify for Chapter 13, a person has to have a steady income, less than $922,975 in secured debts and less than $307,675 in unsecured debts.

Chapter 11

Chapter 11 is usually reserved for businesses or individuals whose secured or unsecured debts exceed the limitations in Chapter 13. This is a very complex bankruptcy chapter; many large corporations like Enron, Kmart and Delta have filed Chapter 11 bankruptcies.

Chapter 11 allows a business to continue normal operating procedures while their case is being reviewed. Companies can only make the usual sales and purchases that are a part of a usual business day. During this time a business may not sell off part of the company, sell a major piece of equipment or property or undergo major expansions.

Like a Chapter 13, these companies or individuals reorganize and suggest a repayment plan. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005; they have 120 days to propose this plan.

As a result, a company filing Chapter 11 may have to close locations, lay off employees or renegotiate union contracts. If it seems the company can no longer operate profitably and make payments, they may be converted to a Chapter 7.

Chapter 12

A Chapter 12 bankruptcy is very similar to a Chapter 13 except it is exclusively designed for those operating farms. To qualify, at least 80 percent of debt has to be in relation to the farm. Only a few hundred people file for a Chapter 12, apposed to hundreds of thousands of people filing for Chapter 13 each year.

Bankruptcy is not a quick fix for all credit problems. There are many adverse effects and it is suggested to only use bankruptcy if it is the only remaining option. Bankruptcies affect credit, which in turn raises interest rates and may not allow someone to qualify for loans on cars or houses.

Filing for bankruptcy may be one of the most difficult decisions a person can make. They have to admit they can no longer afford to pay their debts and need to reorganize them or eliminate them. Bankruptcy is a last resort effort to help people crawl out of a credit hole and get back on their feet.

Resouces

HowStuffWorks, Inc. (2006). Howstuffworks 'How Bankruptcy Works'. Retrieved July 25, 2006, from http://money.howstuffworks.com/bankruptcy.htm

FindLaw. (2006). Retrieved July 25, 2006, from http://bankruptcy.findlaw.com/

Erin Monaghan is a reviewer/writer for TopTenREVIEWS.com. TopTenREVIEWS features expert reviews for technology and entertainment products and services. The company has served over 60 million Internet visitors, has over 400,000 pages of original content and provides users with free access to in-depth product and services reviews, side-by-side feature comparisons, and industry-related news and articles.

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