In the United States, individuals can qualify for one of two types of personal bankruptcy: Chapter 7 liquidation or Chapter 13 repayment. In a Chapter 7 bankruptcy, a court official, known as a bankruptcy trustee, liquidates a debtor's remaining assets and uses the proceeds to pay off some of his or her debts and then discharges the balance. In a Chapter 13 repayment plan, the debtor must repay all or part of his or her debts over a three- to five-year period. The debtor and her lawyer develop a repayment plan that conforms to federal guidelines, and it is approved and supervised by the trustee. Debts are repaid according to priority, and any balance remaining at the end of five years is discharged.
Chapter 13 bankruptcy is an option for two groups of people. The first are those who exceed the federal means test, which determines whether a person has enough income to pay his debts off over time. The second group of debtors are those who wish to keep their assets, such as a home or other valuable property. A Chapter 13 repayment plan allows them to keep their home and valuables while fulfilling the obligations of a structured repayment plan.
The downside to Chapter 13 repayment is that the repayment period is long, up to five years, and all of the debtor's disposable income, outside of court-allowed expenses, is applied toward paying down the debt. During the repayment period, a debtor's income is not his own and his personal finances are subject to the approval of the court. If his personal circumstances take a turn for the worse, he may need to negotiate new bankruptcy terms in order to avoid having his Chapter 13 repayment plan dismissed and being back where he started.
Debts are repaid in order of priority, with obligations such as child support, alimony, and back taxes taking precedence. Next in line for payment are secured debts, such as mortgages, and finally unsecured debt, such as credit card and medical bills. Some debts cannot be discharged in bankruptcy, such as child support, most student loans, and judgments from drunk driving lawsuits. While payments on these debts are made during the repayment period, they will not be discharged at the end of the bankruptcy. Finally, the bankruptcy cannot be fully discharged at the end of the five-year repayment period until the debtor completes an educational course on debt and money management.
