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Individuals can file for bankruptcy in a federal court under two forms of bankruptcy. These two forms are called Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 is a “liquidation” of an individual’s assets. Other terms referred to in this type of bankruptcy include “written off” and “dis- charged.” This form of bankruptcy is sometimes referred to as "straight bankruptcy." Some debts, however (such as real estate mortgages), are not written off or discharged and must be repaid. Individuals are allowed to keep certain assets, and the guidelines for this vary from state-to-state. Cars are often allowed to be kept, usually because they are critical to a person’s ability to continue to work, but if a loan exists on the car, it must be repaid. Other assets are sold (liquidated) to repay debts. Many types of unsecured debt, such as credit card debt, are legally discharged by the bankruptcy process, which means they do not have to be repaid. There are, however, certain types of debt that are not discharged in a Chapter 7. These commonly include child support, taxes, student loans, and fines imposed by a court for any crimes com- mitted by the debtor. Debts that are not discharged must be repaid.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, an individual proposes a plan to repay his or her debts over a three-to-five year period. During this time, the cred- itors cannot attempt to collect on the individual's previously incurred debt. In general, the individual gets to keep his or her property, and the creditors end up with less money than they are owed.
While an individual is under a Chapter 13 bankruptcy, he or she is not allowed to obtain additional credit without the permission of the bankruptcy court. More than likely, creditors will not be willing to risk lending money to the individual anyway.
Things You Should Know About Bankruptcy