Types Of Bankruptcy - What Are The Differences?

An individual in the United States of America has two options when filing bankruptcy, chapter 7 whereby the individual's debts are basically eliminated and chapter 13 in which the individual's debts are allowed to be paid off over five years.

Businesses cannot file under chapter 7 nor 13, they must instead file under Chapter 11. They will be able to use Chapter 11 to renegotiate their debt and too generally reorganize them so they can get back on the road to financial health.

A quick consultation with a bankruptcy attorney will help determine which of the types of bankruptcy the individual qualifies to file under. There are certain tests administered to determine if the individual qualifies to file Chapter 7 under the new bankruptcy laws.

Basically in the test they will calculate the individuals monthly income, if the individuals income is higher than the average in the state he or she resides in, the individual will definitely not be allowed to file under chapter 7 and he or she will then have to file under chapter 13.

In Chapter 7 bankruptcy, all debts, including secured and unsecured can be discharged. However, some assets owned by the individual may be confiscated and sold by the court in order to satisfy a portion of the secured debt.

Clearly out of chapter 13 and chapter 7 bankruptcies, it is chapter 7 which will provide the most financial relief.

Paying Off Debt Over Time

If the individual has to file for chapter 13 instead of chapter 7 they will be required to send monthly payments to a court trustee, the court trustee will then send out payments to any creditor who is listed as part of the payment plan.

Of the two types of bankruptcy this helps a person meet their financial obligations while keeping creditors from taking collection actions against the debtor.

In the past, a lot of people may have started out in Chapter 13 bankruptcy and found they were unable to meet the obligations and so moved into Chapter 7.

However since 2005 when the all-new bankruptcy laws became law, the only way to qualify for chapter 7 bankruptcy is to come up with a below average monthly income result in the courts means test.

So quite simply if the person has the means (the current income level), so as to be capable of paying off their debts, they will have absolutely no choice but to go for a chapter 13 bankruptcy.

Regardless of the type of bankruptcy you have filled, all initial payments will go to the creditors which have the status of what is considered to be priority access. Priority access will generally go to your passed income taxes, any student loans you may have, other government related obligations etc.

Once all of your creditors with priority access have been dealt with the payments to unsecured creditors will start to take place.

It is really, really vital to remember that what ever you do, what ever bankruptcy you can file for, bankruptcy really must be your last option. Once you've filed bankruptcy there is no turning back and it will remain on your public records for as long as 10 years.