The two most common bankruptcy’s filed by individuals are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

The primary purpose of a Chapter 7 bankruptcy is to discharge certain debts to give an honest individual debtor a “fresh start.” To accomplish this, unsecured debts are generally discharged. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Act”) makes it more difficult to pursue a Chapter 7 bankruptcy. Beginning October 17, 2005, you may not file bankruptcy under Chapter 7 as a consumer or business if you are deemed capable of paying your creditors based on new criteria known as the “means test.” The means test compares your excess monthly income and your amount of debt to which you did not pledge any property or “collateral” for the loan (unsecured debt) to determine how much you can pay your creditors. After application of the means test, only those deemed incapable of paying their debts will be allowed to proceed with a Chapter 7 (discharge) bankruptcy. Those deemed capable of paying will either have their case dismissed or converted to a Chapter 13 (repayment plan) bankruptcy.

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Chapter 13 Bankruptcy

Chapter 13 is for persons with a regular income, who desire to pay debts over a period of time under the supervision of the Court.  Under this chapter, debtors are permitted to repay creditors, in full or in part, in installments generally over a five-year period (extended from three years by the 2005 Act), during which time creditors are prohibited from starting or continuing most collection efforts. The 2005 Act, due to the “means test” for all attempted Chapter 7 bankruptcies, will force some Chapter 7 filings to be converted to Chapter 13.

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