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By filing for bankruptcy, individuals or entities that are unable to handle their financial burdens can have their debts canceled, paid through the liquidation of their assets and/or reorganized into an affordable repayment plan.
While many debts can be eliminated through bankruptcy, there are some you may not be able to get rid of, including secured debts, alimony, student loans, taxes and child support.
How Does Bankruptcy Work?
There are several types of bankruptcy, including Chapters 9, 12 and 15. However, most bankruptcy cases fall under the following chapters:
- Chapter 7 bankruptcy gives a bankruptcy trustee the power to cancel most or even all of your debts and/or sell some of your possessions to pay off what you owe.
- Chapter 11 bankruptcy gives debtors, usually businesses, an opportunity to reorganize their debt under a plan approved by the court that will enable them to continue running their business while repaying their creditors. Chapter 11 bankruptcy is generally reserved for businesses, but, in some cases, individuals whose debt or income is greater than Chapter 7 or 13 permit may be able to file under Chapter 11.
- Chapter 13 bankruptcy does not cancel your debts and allows you to keep your property by instead reorganizing your debt so that you can repay your creditors all or part of what you owe them over a three to five-year period.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy involves a repayment plan, allowing you to keep all of your assets, and is usually better for people who have a steady income. Important characteristics of Chapter 13 include:
- Income requirements and debt limits. Your eligibility for Chapter 13 debt relief typically depends on whether you have a steady monthly income that is sufficient to meet your expenses as well as the requirements of a payment plan. Additionally, you cannot file Chapter 13 if your debts exceed a certain amount, though the qualifying limits change yearly.
- Repayment plan. When you file for Chapter 13 bankruptcy, you must detail how much you owe and how much you can pay back each month. You may have some flexibility with this plan, but you must usually pay a substantial portion of your disposable income each month. The court will review your plan to see if it is fair and workable. If the court accepts your plan, then you must remain current with your payments throughout the bankruptcy process. You make your monthly payments to a bankruptcy trustee, who in turn pays your creditors in order of priority.
- Typically lasts three to five years. Unlike Chapter 7, which is over quickly, the Chapter 13 repayment plan usually lasts between three and five years. However, you may keep all of your property.
- Discharges unsecured debts and allows you to manage secured debts. At the end of the bankruptcy process, your remaining unsecured debts will be discharged. Additionally, the repayment plan can allow you to become current on certain debts, like your mortgage, which may survive.
- Certain debts survive Chapter 13 bankruptcy. Some debts are ineligible for discharge, including certain back taxes, student loans and child support payments. However, you must be current with your payments on these debts by the end of Chapter 13 bankruptcy.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is sometimes called “liquidation bankruptcy,” and is usually best for low-income individuals who have few assets. Important characteristics of Chapter 7 bankruptcy include:
- The means test. To be eligible to file this kind of bankruptcy, you must pass the “means test,” which compares your monthly income to the average income of a family of the same size. If your income does not exceed the median income for a similar household in your state, then you automatically qualify for Chapter 7 relief. If your income is more than the median, then you still may be eligible for Chapter 7, depending on the circumstances.
- Liquidation of non-exempt assets. When you file Chapter 7 bankruptcy, the court appoints a trustee who examines your finances and assets. Texas bankruptcy laws allow you to automatically keep certain property (see below). Depending on your situation, most or all of your property may be exempt. However, the trustee will liquidate or sell all non-exempt property, and use the money to pay a portion of your outstanding debts.
- Typically lasts three to six months. The entire Chapter 7 bankruptcy process typically lasts between three to six months.
- Discharges unsecured debts. At the end of the bankruptcy process, the court will grant you a discharge. This effectively erases all outstanding unsecured debts – you will not ever have to pay them back. However, you cannot file for Chapter 7 bankruptcy again for eight years.
- Certain debts may survive Chapter 7 bankruptcy. While bankruptcy can wipe away much of what you owe, certain debts cannot be discharged. Secured debts, such as a mortgage or car loan, cannot be discharged unless you also surrender the property. Additionally, overdue child support payments, certain types of back taxes and student loans are ineligible for discharge.
Learn More About Bankruptcy:
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Bankruptcy is a big step and one that should not be taken lightly. That is why those considering it for themselves or their business should speak with an attorney to figure out whether it is right for them.
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