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Bankruptcy For Individuals
Chapter 7 & Chapter 13
Bankruptcy is when a company or person declares legally that they cannot repay their debts. It's purpose is to give debtors a new start and have the courts impose a fair and reasonable repayment plan so the creditors get something in return for their losses. In ancient times people who could not repay their debts could be sent into prison or debt slavery. They would labor physically as a servant until their debts were repaid. Thank goodness it isn't like that today.
Chapter 7 Bankruptcy
With respect to individual consumers the common forms of bankruptcy are Chapter 7 and Chapter 13. Chapter 7 Bankruptcy is known as straight bankruptcy or personal bankruptcy. The law states that most assets held by the debtor are to be turned over to the courts and sold to repay the debts. However, in reality the debtor is allowed to keep most of their assets. Most of the consumers personal assets like primary residence, car, and personal possessions are not confiscated. Most people filing for bankruptcy don't have too many assets anyway. The most common debt that the courts will forgive during bankruptcy are credit cards, medical bills, personal loans, and liability lawsuits. Taxes, student loans, and child support are usually not exempt and must still be paid by the person filing for bankruptcy. It's also interesting to note that liability for personal injury and property damage from drunk driving accidents are not exempt and must still be repaid. Although home loan and car loan debts are forgiven by the courts the creditors still have the right to foreclose on a house or repossess a car. This is because these debts are secured by collateral that can be sold to repay the creditor.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy allows debtors to keep their property (home, car, etc). However, they are required to make payments to a 3rd party trustee who then distributes these payments to the creditors in a fair manner. This is a type of debt reorganization and usually last from 3 to 5 years. It's expected that the consumer will be 'back on their feet' by then and able to switch back to making regular payments with the oversight of the trustee. To qualify for chapter 13 the debtor must have less than about $800,000 in secured debt and $269,000 in unsecured debt.
Bankruptcy Changes in 2005
In 2005 a bankruptcy reform law was passed that made it more difficult for people with income above the median to qualify for the more lenient chapter 7 bankruptcy. If a consumer makes too much money they will be forced into chapter 13 bankruptcy which requires they be put on a payment plan.
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