What Type of Personal Bankruptcy Should You File?
Filing for personal bankruptcy is a way for you to relieve your debts, given the inability to pay your creditors. There are two types of bankruptcy you can file: Chapter 7 (total liquidation or straight bankruptcy) and Chapter 13 (reorganization or repayment plan).
Chapter 7 Straight Bankruptcy
Under Chapter 7, most of your debts are repaid upon liquidation of most of your assets. There is no repayment plan involved, but expect your properties to be sold for the benefit of creditors.
All non-exempt assets are to be used to repay debts. Non-exempt assets are those determined by the court for debt repayment, and may include checking and savings accounts. Once all of your non-exempt assets have been liquidated and distributed, you are discharged from all debts.
In order to qualify for a Chapter 7, you must pass a mean test showing your income is less than the median income in your state. If you fail, you can resort to filing Chapter 13.
Chapter 13 Reorganization
Under Chapter 13, you repay your debts through a repayment plan with a 3- to 5-year term. Upon filing, you need to submit to the court a repayment plan, upon which you start making payments to the court, which in turn pays your creditors. It will take several hearings (a few weeks) for the court to approve the plan, but you are required to start paying creditors whether the plan has been approved or not. After you have accomplished your Chapter 13 repayment plan, you are discharged from any debt.
For a repayment plan to be approved, it must pass two tests. First, it must pass the best-interest test, wherein unsecured creditors must be paid as much as they ought to get when you filed Chapter 7, rather than Chapter 13. Second, it must pass the best-effort test, wherein you surrender all of your disposable income (income minus living expenses) to the trustee for distribution to creditors for at least the first 3 years of the plan.
Allowable living expenses are based on the Internal Revenue Collection Financial Standards.