What are the differences in bankruptcy, and how do you know if you should file?

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What are the differences in bankruptcy, and how do you know if you should file?

Asked on December 8, 2012 under Bankruptcy Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

At the end of this answer, I will paste a link to a good U.S. government website about bankruptcy.

In brief, there are two kinds of bankruptcy for individuals:

Chapter 7, in which your assets (money in bank or brokerage accounts; property), subject to certain exemptions, are liquidated, or sold for the benefit of creditors: they are paid as much as possible, and the remaining debts discharged.

Chapter 13, in which you are ordered to live by a very strick court-ordered budget (the "plan") for three to five years, paying creditors as much as possible during that time, after which debts are discharged.

Whether to file bankruptcy depends on whether you owe more than you can possibly pay, can't negotiate a payment plan or settlement with creditors that you can live with, and have creditors who are--or likely will be--actively seeking to collect on their debts. If this is the case, you are a good candiate for bankruptcy.

Chapter 7 is better if you have comparatively few assets, but a good income--let creditors take what you own, then start over.  Chapter 13 is better if you a lesser income, but assets you want to protect.

The above is a huge oversimplication: there are eligibility requirements; secured debts (like mortgages and car loans) have to be either paid or you lose the property (though at least you won't also be sued for a any unpaid balance); and certain debts, like tax debts, government backed or insured student loans, child support, and awards from DUI cases, are not dischargeable. If at all possible, consult with experienced bankruptcy counsel before deciding what to do.

Here's the website: http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics.aspx

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