Because people in all types of situations file bankruptcy, the rules may vary according to factors such as income, assets, types of debt and even personal preference. Most individuals or couples file either Chapter 7 or Chapter 13.
Here is a look at some of the differences between the two.
The U.S. Courts webpage explains that bankruptcy law provides an income test that reveals whether people qualify to liquidate their debt through Chapter 7 or create a repayment plan through Chapter 13.
Some people have an income, but it does not stretch far enough to pay all the bills each month. If they opt for a Chapter 13 bankruptcy, they can work with the trustee to develop a payment plan that allows them to pay for necessities and as much of their debt as they can afford.
Others have lost or reduced income or significant debt that they cannot pay. Their test results may show that they qualify for Chapter 7, which will result in debt discharge and a completely fresh start.
Liquidation vs. reorganization
Many people worry that they will lose their vehicles and homes, so they do not even consider bankruptcy. However, losing these particular assets is not a foregone conclusion.
Chapter 7 does allow people to keep their homes and vehicles in certain situations. For example, a mortgage lender may allow a filer to reaffirm the debt and continue making payments on the loan, particularly if the filer is not behind on payments. Bankruptcy exemptions may apply in the case of a vehicle so that a filer can keep it.
According to the Bankruptcy Courts, the payment plan involved in a Chapter 13 bankruptcy includes secured debts first. This typically includes the mortgage, vehicle loans and arrearages on these. As long as filers pay their scheduled payments to the trustee, they are able to keep their homes and vehicles. Payments typically do not include unsecured debts such as credit cards and medical bills, so if a filer does not have enough disposable income to pay these, the court discharges them when the filer completes the payment plan.