Bankruptcy has helped people start over for more than 200 years. Each of the Thirteen Colonies each had their own bankruptcy laws and bankruptcy was enshrined in the U.S. Constitution. However, bankruptcy laws at our country’s founding looked very different than they do today. When the United States was founded, debtors had to sell all of their property and possessions to obtain a discharge. This is much more draconian than our current bankruptcy laws.
What is Bankruptcy?
Bankruptcy is the court-administered process for discharging debt. There are several different types of bankruptcy, and this post will focus on the two most common types used by private individuals: Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. In 2017, 99.86% of the 767,721 non-business bankruptcies filed in the United States were Chapter 7 and Chapter 13 bankruptcies. Other types of bankruptcy include Chapter 9 bankruptcy, which is used by municipalities, Chapter 11 bankruptcy, which is mostly used by businesses, Chapter 12 bankruptcy, which is used by family farmers and fisherman, and chapter 15 bankruptcy, which is used by foreign companies with U.S. debts.
Chapter 7 Bankruptcy
Chapter 7 bankruptcies are the most common type of bankruptcy in the United States. In a Chapter 7 bankruptcy, debtors first list all of their property and debts. They then begin exempting certain assets. Because the purpose of bankruptcy is to give debtors a fresh start, Chapter 7 bankruptcies allow you to keep certain property, use any remaining property to pay your debtors, and eliminate the rest of your debt. Examples of property that can be exempt are a house, car, personal property and retirement accounts. About a month after filing bankruptcy, the debtors meet with the trustee who reviews the debtors’ documents and asks questions. Afterwards, the trustee will discharge the rest of the debtors’ debts.
Chapter 7 bankruptcy can be a wonderful tool for getting a fresh start. However, not everyone is eligible for Chapter 7 bankruptcy. In order to be eligible, debtors must make less than a median income for their state or have little disposable income each month. If a debtor meets these requirements, they can file for Chapter 7 bankruptcy. If they don’t, they can file for Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
While not as debtor-friendly as Chapter 7, Chapter 13 bankruptcies also allow individuals to discharge their debts and start over. Like in Chapter 7 bankruptcy, debtors in Chapter 13 bankruptcies list all their assets, their debts, and can exempt certain property However, in a Chapter 13 bankruptcy, the debtor will then submit a payment plan. If the payment plan is accepted, the debtor will follow that payment plan for 3-5 years, and the Trustee will use that money to pay the debtor’s creditors. If the debtors follow the plan, the trustee will discharge their remaining debts at the end of the plan. This process ensures that creditors are paid some of their debts while also allowing the debtor a fresh start.
Bankruptcy is a complicated process but can also help struggling debtors escape mountains of debt. If you believe that bankruptcy may be right for you, contact a bankruptcy attorney today.