Bankruptcy is a legal process designed to help individuals and companies reduce or eliminate their debts. The laws related to bankruptcy, called the United States Bankruptcy Code, define several different types of bankruptcy processes. The procedures and effects vary according to the type of bankruptcy procedure used.
Most individuals file for bankruptcy under Chapter 7. Often called liquidation bankruptcy, Chapter 7 is intended for people with limited incomes who cannot repay even a portion of their debt. The judge issues an order that eliminates most of the debt, but most of the person's possessions are forfeited in the process. Chapter 13 is available to people having difficulty paying their debts and who have enough income to make monthly payments for three to five years. The debtor is able to keep his possessions but must repay at least some of his debt according to a court-approved plan.
Discharge of Debt
The bankruptcy court has the power to discharge certain debts, which means that the debt is eliminated and the debtor is no longer liable for it. Each type of bankruptcy has its own rules about discharging debts. In Chapter 7 cases, the court eliminates eligible debts about four months after the case is filed. In Chapter 13 cases the court discharges the remaining balance on eligible debts at the end of the payment period.
Certain types of debts cannot be discharged in bankruptcy. The rules vary according to the type of bankruptcy you file. In a Chapter 13 case, the court discharges any balance owed on dischargeable debts after the debtor completes the agreed-upon payments. The court cannot, however, discharge the balance owed on the debtor's home mortgage, alimony, child support, student loans and certain taxes. The debtor is also responsible for the balance owed on court judgments for death or personal injuries he caused while driving under the influence. In a Chapter 7 case, the list of nondischargeable debts also includes recent taxes, penalties owed to the government and debts listed in a previous bankruptcy that were not discharged.
Sometimes debtors cannot make all of the agreed-upon payments under the Chapter 13 plan. If the debtor cannot work because of an illness or injury, for example, he may request a hardship discharge from the court. The debtor must show that the reason for being unable to complete the plan was not his fault and not under his control. He must also show that he could not complete even a modified plan and that the creditors have received at least as much money as they would have received under a Chapter 7 liquidation case. If the court grants the hardship discharge, it will not apply to debts not dischargeable under Chapter 7.