Types of Personal Bankruptcy

People considering personal bankruptcy as a debt management tool should do so as a last resort. It can be the best option for people who meet the eligibility requirements and can offer them a fresh start if they simply cannot ever satisfy their debts. People who follow the bankruptcy rules receive a discharge, which is a court order that says they are not required to repay certain debts.

However, bankruptcy information can stay on a credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job. Individuals considering bankruptcy as an option should seek legal advice from an attorney or the local bankruptcy court to find out if they are eligible to file and to receive a full explanation of the entire process.

The two primary types of personal bankruptcy are Chapter 7 and Chapter 13. Many people are confused about the differences between the two.

Chapter 7 is known as straight bankruptcy, and involves liquidation of all assets that are not exempt. What property may be exempt is determined by individual state laws and may include automobiles, work-related tools, and basic household furnishings. The property that is not exempt may be sold by a court-appointed official, named a trustee or bankruptcy administrator, or it could be turned over to creditors. There is an 8 year waiting period after receiving a discharge in Chapter 7 before an individual can file it again.

Chapter 13 is filed by individuals who have a secure and steady income and do have the ability to pay off all or a good portion of the debts they owe. The court establishes a repayment plan that normally lasts between 3 and 5 years. A trustee or bankruptcy administrator collects and distributes payments to creditors for the debtor. The court does have the ability to lower payments or interest paid on behalf of a debtor in a Chapter 13 case.

Both types of bankruptcy may eliminate unsecured debts, stop foreclosures, repossessions, garnishments and harassment from debt collectors. In most cases, neither type of personal bankruptcy can discharge child support, alimony, fines, taxes, and student loan obligations.

Visit the United States Courts website for eligibility requirements and basic information regarding both types of personal bankruptcy. Also, an important resource for information regarding bankruptcy is the United States Trustee Program website. The U.S. Trustee Program is a part of the Justice Department that works to ensure the integrity of the U.S. bankruptcy system.

Filers must meet all eligibility requirements to have a bankruptcy discharged, including taking a Pre-Bankruptcy Credit Counseling course and participating in a Post-Filing Debtor Education course from an approved agency. The agencies are approved by the U.S. Trustee Program and can be found at http://www.justice.gov/ust/eo/bapcpa/ccde/.

It is always a good idea to seek legal advice to determine if bankruptcy is the best option. Other possibilities may include negotiating with creditors or contacting a credit counseling agency for assistance in negotiating with a creditor. The National Foundation for Credit Counseling provides information regarding credit counseling agencies and other tools for financial education.