Two types of bankruptcy for individual debtors are common in the United States, called chapter 7 bankruptcy and chapter 13 bankruptcy. Chapter 7 bankruptcy, also called liquidation bankruptcy, is the most common form of bankruptcy filed in the United States; after a successful chapter 7 filing, all dischargeable debts are cleared. Chapter 13 bankruptcy, also called reorganization bankruptcy, creates a payment plan which allows one to repay debts over a period of time under more reasonable conditions.
Chapter 7, also known as liquidation bankruptcy, is the most common kind of bankruptcy. It also offers immediate relief from creditors. After a successful chapter 7 filing, all dischargeable debts are wiped out.
In Chapter 13 bankruptcy, the debtor will have a repayment plan so that they can pay off all their debts over a period of time. Some debts may be erased immediately, but this doesn't always happen. One major advantage of Chapter 13 bankruptcy over Chapter 7 bankruptcy is that the debtor may be allowed to hold on to some assets which would have been otherwise liquidated under Chapter 7.
Don't think chapter 13 bankruptcy is a complete easy street. However, here are a few examples of the kinds of debts which can only be cleared under Chapter 13 bankruptcy -Debts from a divorce or settlement agreement -Court fees -Home Owners Association, condominium, or coop fees -Retirement plan loans -Non dischargeable tax debts -Debts from a previous bankruptcy
Generally, debts which are not dischargeable by any means include: - Those which were incurred through fraudulent actions - Student loans (unless the debtor can prove that repaying the loan would cause "undue hardship") - Domestic support obligations, such as child support payments, alimony, etc. - Criminal penalties - Intoxicated driving debts - Debts arising from willful or malicious acts
Income tax debts can be discharged, but only under certain circumstances. The restrictions include, but are not limited to that you have to have filed a tax return for the year you owed the taxes, and the tax debt must be from a tax return filed at least two years before your bankruptcy filing.
Bankruptcy filings require that the debtor report all creditors and their addresses; debts which are not listed cannot be discharged. If the creditor has moved without providing a forwarding address, or the notice is lost in the mail or notice cannot be sent for any reason out of the debtor's control, the debt will be wiped away as long as it is legally dischargeable. However, debts which cannot be assessed for reasons which are under the debtor's control (e.g. the debt is not listed or the address given is incorrect) may not be discharged.
Life after bankruptcy can be as hard or as easy as the debtor makes it, to a certain extent. A bankruptcy filing in one's credit report will make it harder for him or her to be granted credit in the future, and under chapter 7 bankruptcy, certain assets may be liquidated. However, the debtor can prevent creditors from taking his or her bank account or wages - though liens on a home may still remain. Being honest with your bankruptcy lawyer and cooperating with the court and creditors may make life easier after a bankruptcy filing - hiding secrets from your lawyer and the court can only cause more problems.
Bankruptcy can be a reasonable solution if you are drowning in debt. Just don't view it as a magic cure-all that won't have any consequences. One of the biggest problems of bankruptcy, is it gives you an immediate cure, but doesn't necessarily do anything to solve the underlying issues that got you in debt in the first place.