Personal Bankruptcy

There are two types of personal bankruptcy. A “liquidation” bankruptcy or a “payment plan” bankruptcy.

Liquidation Bankruptcy: The “liquidation” bankruptcy is referred to as a Chapter 7 Bankruptcy. “Liquidation” is a terrible phrase and does not really describe this type of bankruptcy. Your possessions are rarely “liquidated” in a bankruptcy. For most middle-income families, you can keep all of your possessions and eliminate your credit card debts and medical debts.

  • Filing a Chapter 7 Bankruptcy will stop litigation and stop collection efforts by creditors.

  • It allows you to eliminate your personal liability for most debts, such as credit card debts, medical debts and any debt remaining after the repossession of a vehicle. You can also eliminate certain types of tax debts.

  • For debts that are “secured” such as mortgage debts and vehicle loans, if you want to keep the house or the car you must continue to pay the debt. If you cannot pay the debt, the lender may be allowed to foreclose or repossess, but you can eliminate any remaining debt owing to the lender.

  • Other than assets that are “collateral” for lenders (such as your home for a mortgage loan or your car for a vehicle loan) you are generally allowed to keep all of your property. However, if you own a second home and there is equity in the home, or you have multiple vehicles or business assets, if you file a Chapter 7 Bankruptcy, some of those assets may be taken from you and sold by a bankruptcy trustee. The money is used to pay toward your debts. If you are thinking about a bankruptcy and you are worried about this, you must talk with an attorney before you give away property or sell things for less than market value.

Payment Plan Bankruptcy: A “payment plan” bankruptcy for most people will be a “Chapter 13 Bankruptcy.” The payment plan bankruptcy stops any ongoing collection efforts, but it also allows you to re-structure your secured debts (mortgage loans and car loans) and often allows you to retain all of your assets, depending on how much you are able to pay to your creditors through a multi-year payment plan.

  • If you have enough income to pay something toward your credit card debt, but not enough to make the full monthly payment, a “payment plan” bankruptcy allows you to pay what you can afford to pay for a period of five years, then eliminate the remaining unpaid debt.

  • If you are past-due on your mortgage, facing foreclosure and you do not qualify for a mortgage loan modification, the payment plan bankruptcy allows you to stop the foreclosure. If you can resume the regular monthly mortgage payments, you can repay the past-due amount over a five-year term and prevent the foreclosure.

  • If you have a vehicle loan, you can often spread out the payment over a five-year term and make the payment more affordable.

  • If you have tax debts that cannot be eliminated in a liquidation bankruptcy, you can stop the taxing authority from taking collection efforts and repay the back taxes through the payment plan.

  • If you have property that would be taken by the trustee in a liquidation bankruptcy, you can often keep that property in a payment plan bankruptcy, depending on how much you can afford to pay to your creditors through the payment plan.

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