Bankruptcy is a court process that allows an individual or business to get relief from their debts. The ultimate goal of bankruptcy is to give the individual or business a fresh financial start while being fair to the creditors.

Filing for Bankruptcy as a Consumer

There are two ways an individual consumer can file for Bankruptcy: Chapter 7 and Chapter 13. Once bankruptcy proceedings are started (whether through Chapter 7 or Chapter 13), creditors cannot attempt to collect debt from the individual until the bankruptcy process has ended.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often called "liquidation bankruptcy." This process starts when a petition is filed with the bankruptcy court detailing the individual's property, debts, and financial situation. The court then appoints a trustee who determines which, if any, of the individual's property must be sold off to pay their debts.

Much of the individual's property is not sold. This property is called "exempt" property. Exempt property may include homes, vehicles, personal property, insurance policies, and retirement accounts. Check with a local attorney for exemptions in your area.

Many of the debts will be "discharged," meaning that they will not have to be paid. Some debts, however, are not dischargeable, including:

  • Student Loans
  • Recent Taxes
  • Child Support and Alimony
  • Legal Fines (i.e. traffic tickets)

The bankruptcy process is complete once all the debts have been either paid or discharged.

Chapter 7 bankruptcy is usually best for people who:

  • Have no steady stream of income
  • Have a lot of exempt property
  • Cannot keep up with a strict payment plan

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows an individual to pay off his debt over time. The process starts when the individual files a petition with the bankruptcy court. This petition includes a complete list of all the individual's debts and assets. Additionally, the petition must include a payment plan that describes how the debt will be paid off over the next three to five years.

The court then appoints a trustee who will review the payment plan. The trustee has the power to approve or reject the plan. Once the payment plan is approved, the debtor must make monthly payments to the trustee, who will distribute those payments to the creditors as laid out in the payment plan.

Once the payment plan has been completely fulfilled, the individual is out of bankruptcy.

Chapter 13 bankruptcy is usually best for people who:

  • Do not want to lose their property (including real estate, cars, and personal property)
  • Have a lot of nonexempt property
  • Have a steady stream of income and can eventually pay of their debts
  • Can live with a strict budget and adhere to a strict payment plan

Do I Need a Bankruptcy Attorney?

Whether you are filing chapter 7 or chapter 13, bankruptcy can be a complicated process. It is vital to know how the law regulates bankruptcy in your state, including what property exemptions you can claim. A bankruptcy lawyer knows the ins-and-outs of filing for bankruptcy, and can recommend what chapter of bankruptcy is right for you.

Vea esta página en español: Bancarrota (Quiebra) del Consumidor o visita para más información legal.