The term “Bankruptcy” refers to a legal process by which a person who cannot afford to pay back an outstanding debt is either exempted from paying it back or are given a new payment plan so that he can afford to pay it back depending upon the debtors financial condition. In US, it is a federal court process to help debtors to give a fresh start in their finances by avoiding the previous debts through an order of the Federal court. Once bankruptcy is filed in a federal court, the creditors have to stop collecting the debts. Moreover, by filing bankruptcy, all pending foreclosures, garnishments and other court orders can be stopped temporarily. One cannot file a bankruptcy if a bankruptcy petition has been dismissed in the preceding 180days.
There are different types of bankruptcies of which Chapter 7 and Chapter 13 are the most important. It is not always possible to choose among the types of bankruptcies you intend to file. If you want to file a bankruptcy, you need to approach the Federal Court and file a list of outstanding debts and assets and the federal court generally decides the type of bankruptcy you can file. However, under the new bankruptcy law, it is not easy to qualify for bankruptcy because if you have an income above the median income level, you need to undergo a 180 day credit counseling before filing bankruptcy.
Most people prefer to file a Chapter 7 bankruptcy. Chapter 7 bankruptcy is also known as “liquidation” or “straight bankruptcy” since under such a bankruptcy, the debtor requests the Federal Court to discharge your outstanding debts. Under such a bankruptcy, the Federal Court may sell off a portion of you property and pay off some of the outstanding debts and as a result the debts listed under the Chapter 7 bankruptcy gets exempted. However, it should be noted that not all of your personal property can be sold under Chapter 7 bankruptcy. Some of the items that are exempt from attachment under this bankruptcy include household appliances, vehicles, clothing, jewelry up to certain limit, pensions and social security benefits. Hence, this type of bankruptcy is filed if the debtor has no assets to lose.
Chapter 13 bankruptcy is also known as a “debt adjustment” bankruptcy and it requires the debtor to pay back the outstanding debts by a repayment plan from his present income. Under Chapter 13 bankruptcy, you need not hand over the assets to discharge your debt and you may pay back the outstanding debt within a 3 to 5 year period from your monthly income.
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