The United States Bankruptcy Code is divided into six different chapters. The most common types of consumer bankruptcy filed by individuals are Chapter 7 and Chapter 13. The major difference between the two types (as discussed in more detail below) is whether personal debts are erased (i.e., Chapter 7) or arranged to be repaid (i.e., Chapter 13).
The Means Test
The "means test" determines whether an individual would file Chapter 7 or Chapter 13 bankruptcy. So, once you have made the decision to file for bankruptcy, your attorney will walk you through this means test to determine your next course of action. First, your income will be compared to the state median income in Arizona. If your income is lower than the state median or if you demonstrate that your monthly income is not sufficient to pay your current monthly debt, then you may qualify for Chapter 7 bankruptcy. Otherwise, you may file for Chapter 13 bankruptcy.
Chapter 7: Liquidation
This type of bankruptcy typically eliminates all of your debts. You are permitted to keep any property claimed as "exempt:" this property usually includes household items, personal effects, an automobile or primary home, and other daily essentials. Then, the rest of your property/assets are sold (i.e., liquidated), and the profit received from liquidating your assets are split among your creditors. After the liquidation process, the court decides whether to discharge your debts and the exact amount that will be discharged. Many individuals only possess exempt property and, thus, will not surrender any of their property for liquidation. The filing of Chapter 7 bankruptcy is allowed only once in an eight-year period.
Chapter 13: Repayment / Consumer Debt Adjustment
Chapter 13 bankruptcy is designed for individuals who have a regular flow of income and are seeking an adjustment to the repaying of their current debt. These individuals may wish to keep all of their assets, but they need more time to repay their creditors. If you file Chapter 13 bankruptcy, you first submit a plan to the court for how you intend to repay your debts. If the court approves your repayment plan, then your creditors are notified of the new repayment schedule. Individuals are generally granted three to five years to complete the repayment plan. Once the court-approved repayment plan is completed, any additional debts are usually discharged.
