Bankruptcy is a court-supervised process of restructuring debt to give the debtor a fresh start at economic security. Depending on the type of bankruptcy proceeding, you can either reorganize you debts to be paid off over the course of a multi-year plan, or have all your assets liquidated to pay off creditors. Four bankruptcy options are available to individual debtors under federal bankruptcy laws, although two -- Chapter 7 and Chapter 13 -- are much more common than the others. Each is named after its chapter of the bankruptcy code.
In a Chapter 7 bankruptcy, the bankruptcy trustee takes nearly all of your assets, if you have any, and sells them to pay creditors. Under federal law, you can keep only $15,000 worth of equity in real estate, a car worth up to $2,400, and a small amount of personal jewelry as well as some limited public support payments. States may adopt variations of these exemptions, but the dollar value of exempted assets under state law is similar. Once your assets are liquidated, most of your remaining debts are discharged by the bankruptcy court. However, taxes, student loans, alimony and child support, and judgments for personal injury or criminal restitution cannot be discharged in bankruptcy.
Chapter 13 bankruptcy allows you to restructure your debts in a three- to five-year payment plan. Chapter 13 bankruptcy is often preferable if you own substantial equity in your own home, as it allows you to keep the house and can forestall foreclosure proceedings. You must complete a court-approved credit counseling course before you can file a Chapter 13 bankruptcy. Filing for Chapter 13 effectively halts all collection actions, and relieves you of contact from creditors through the course of the repayment plan. Once you have completed payments under the court-approved plan, the court will discharge your remaining debt. As with Chapter 7, however, several classes of debts, such as taxes and student loans, cannot be discharged.
A Chapter 11 reorganization is similar to Chapter 13, but it is available to debtors with debts too high to qualify for Chapter 13 or Chapter 7. The Chapter 11 bankruptcy process provides many of the same protections as other personal bankruptcy options: you typically receive some protections against home foreclosure, vehicle repossession and other collection actions. Individuals in Chapter 11 bankruptcy must devise a five-year plan to pay down their debts. The creditors must approve the plan before the court will accept it.
Chapter 12 bankruptcy is quite similar to Chapter 13, but it is designed to address the needs of family farmers who may not meet the wage-earning regular income requirements necessary to quality for Chapter 13. Chapter 12 debtors can continue operating their farm, and can develop a three- to five-year repayment plan. Long-term debt may be extended beyond the five-year plan period; that is, the court can discharge the bankruptcy after five years with the condition that the long-term debt repayment continue. A Chapter 12 bankruptcy can be converted to a Chapter 7 if it becomes apparent that income is insufficient to continue operating the farm business.