Bankruptcy is a legally declared inability or impairment of ability of an individual pay their creditors. The two most common forms of Bankruptcy for individuals are a Chapter 7 Bankruptcy, which is considered a liquidation and a Chapter 13, which is considered a reorganization. Chapter 7 is the most common form of Bankruptcy in the United States.

Chapter 7 Bankruptcy

Chapter 7 is considered liquidation of assets. Among other things, a debtor must meet certain criteria with regard to net worth and disposable income to prove to the court that they have an inability to pay some or all of their non-exempt creditors in full from their disposable income.

Although this type of Bankruptcy is considered a liquidation, individuals are allowed to keep certain types of property which are considered exempt. Examples might be Real Estate or Vehicles. The liens on these properties survive the Bankruptcy which means the money is still due to the creditors under the terms of the original note. The value of property which can be claimed as exempt varies from state-to-state and will be advised by an attorney. However, if you are considering to file for Chapter 7, and intend to attempt to keep your vehicle(s) and home, I suggest you atleast keep making these payments on time to maintain some timely payment record on your credit as you go through the process.

Many types of unsecured debt  may legally be discharged by the bankruptcy proceeding like credit cards and other unsecured debts. But there are various types of debt that may not be discharged in a Chapter 7. Common exceptions to discharge include child support, most taxes, most student loans, and fines and restitution imposed by a court for any crimes committed by the debtor.

Bankruptcy discharge stays on the individual's credit report for up to 10 years. This may make credit less available and/or terms less favorable after your discharge. Usually around the month and year of the initial filing, all creditors will seize reporting activity on credit reports. This means that balances and any past due amounts reporting during that month and year will freeze and no changes are normally made to these amounts until after the Bankruptcy has been discharged. In my experience with credit, I have seen very high scores within 12 months of a discharge of a Chapter 7 Bankruptcy if the individual(s) take the time to dispute balances and past due amounts by sending copies of their discharge to each of the three credit bureaus. Usually, creditors that are discharged in a Bankruptcy do not take the time to accuratly report to the credit bureaus that the debts have been discharged. I have seen “frozen” balances and past due amounts linger on a report for several years after a discharge. It is imperative to the timely restoration of credit that a copy of the credit report is obtained and any balances or past due amounts immediately be disputed following a Bankruptcy discharge.

Chapter 13 Bankruptcy

Chapter 13 Bankruptcy filing is a way for individuals in the United States to undergo a financial reorganization which is supervised by a trustee assigned by the court. The goal of Chapter 13 is to enable individuals to repay their debts through a court-approved repayment plan. Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3 to 5 year period. This plan is prepared by an attorney. During this period, creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his or her property, and the creditors end up with less money than they were originally owed.

During the 3 to 5 year re-payment period, the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court. Additionally, the Bankruptcy is not considered “discharged” until the plan has been completely repaid. This usually puts life on hold temporarily with regard to borrowing for anything unless approved by the court.

The debtor's financial characteristics play a tremendous role in choosing whether a Chapter 7 or Chapter 13 will be sought. In some cases the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to repay their debts as required by a viable Chapter 13 plan. Furthermore, United States code sets forth debt limits for individuals to be eligible to file under Chapter 13. The debt limits for filing Chapter 13 are unsecured debts of less than $336,900.00 and secured debts of less than $1,010,650.00. These debt limits are subject to annual cost of living increases and represent values updated through April 1, 2007.