Chapter 7 & Chapter 13 Types of Bankruptcy

Chapter 7 and Chapter 13 are the most common types of bankruptcy in the United States.Economic crisis image by Denis Ivatin from Fotolia.com

Bankruptcy is the process of making a legal declaration that a person or a business (the debtor) is unable to satisfy the debt owed to a creditor. There are a number of types and ways to file bankruptcy, all of which are governed by Title 11 of the federal code in the United States. The implications and impact of bankruptcy are long-term and the process is extremely time consuming and difficult, so alternatives to bankruptcy should be carefully considered before filing.

Chapter 7 Basics

Chapter 7 bankruptcy involves a liquidation of assets process to reconcile a person's debt. For individuals filing Chapter 7, certain assets can be kept, while other assets are sold to reconcile the debt. Once you complete a credit counseling course, you can file for bankruptcy with the courts and a trustee will be assigned. The trustee will evaluate your assets and liabilities and determine if you're a candidate or not. Your assets will then be sold to pay off your creditors. Remaining debt can typically be discharged, unless it is from child support, taxes, student loans and legal fees.

Chapter 13 bankruptcy is generally considered a reorganization of debt to settle a bankruptcy since you do not have to relinquish any property as part of the settlement process. Prior to filing for Chapter 13 bankruptcy, you are required to complete a credit counseling course. Following counseling, the bankruptcy petition is filed and a trustee is assigned to your case. The trustee will determine eligibility, examine your debt, prioritize the debt and create a repayment plan. The repayment plan will be based upon your income. The repayment plan is generally four to five years long.

The primary difference between Chapter 13 and Chapter 7 bankruptcy is how the debt is reconciled; a plan of repayment is required for Chapter 13 bankruptcy but not for Chapter 7 bankruptcy. With Chapter 7 bankruptcy, some of the debtor's assets are sold to pay off the creditors and property losses are inevitable. In addition, Chapter 7 bankruptcy will stay on a credit report for 10 years, while a Chapter 13 bankruptcy will stay on a credit report for seven years.