Bankruptcy

There are several different kinds of bankruptcy for different entities and situations. The two most popular forms of personal bankruptcy are Chapter 7 and Chapter 13 bankruptcy.

Chapter 7

With Chapter 7 bankruptcy, a debtor in hardship can discharge many (but not necessarily all) debts. The court seeks to pay off some debts by liquidating the debtor’s property that is not exempt by law. A trustee uses money from the sale of the property to pay creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made filing chapter 7 bankruptcies more difficult by instituting a means test to consider a debtor’s financial condition.  The goal of Chapter 7 is to give an honest debtor a “fresh start.” On the negative side, a Chapter 7 bankruptcy stays on your record for 10 years, and a creditor on a secured debt still has a right to the collateral on a discharged debt.

Chapter 13

With a Chapter 13 bankruptcy, designed for debtors with regular incomes, the debtor devotes a portion of his income to repaying debts over a course of three to five years. Chapter 13 bankruptcy protects property, and stops collection efforts and other actions against the debtor or his property. A person filing under Chapter 13 bankruptcy can save a home from foreclosure, extend secured debts over the length of bankruptcy, and avoid direct contact with creditors. However, a Chapter 13 bankruptcy also stays on your credit report for seven years.

Bankruptcy law changed substantially with The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (April 20, 2005) ("BAPCPA"), which made it more difficult to file for bankruptcy. Primarily it passed a means test for income for Chapter 7 applicants. It also expanded the Chapter 13 repayment period from three to five years, instituted the use of IRS guidelines to determine reasonable living expenses, forced debtors to pay the full amount on a car loan of less than 2 ½ years from the filing date, and required participants to take credit counseling and debtor education sessions.