Click here to request a FREE Quote or call Toll Free 1-877-254-4180

Debt itself is not necessarily a negative. Indeed, many economists will tell you that debt makes the world go round. When people are willing to lend out accumulated capital, it signals confidence in borrowers, in the economy, and in the integrity of the legal system–which lenders depend on to protect their interests.

Excessive debt is another matter entirely. It can cripple borrowers and stagnate economic activity. And when debt reaches the point that it can’t be serviced by borrowers, and has essentially zero chance of ever being repaid (absent intervention), bankruptcy is the only real option left.

Though the conditions imposed on borrowers are often harsh, bankruptcy laws relieve debtors of their legal responsibility to repay their debts. Often, this protection is designed to give borrowers enough breathing room to organize themselves and have a much better chance of eventually repaying their debts–in whole or in part.

There are two types of bankruptcies in the United States: liquidation, in which borrowers’ debts are “discharged” (or wiped out), and reorganization, where borrowers present a plan to the court describing how they plan to repay their creditors.

Liquidation bankruptcy is also known as “ordinary,” “straight,” or “Chapter 7” bankruptcy and can be invoked by both individuals and businesses. This is, by far, the most common type of bankruptcy claimed by individuals. Liquidation bankruptcy demands that an assigned trustee sell off the debtor’s assets to begin repaying his or her creditors.

Reorganization bankruptcy involving (most) individuals is known as Chapter 7 bankruptcy, while that involving smaller businesses is known as Chapter 13. However, when extraordinary levels of debt are involved–incurred by either individuals or businesses–the relevant bankruptcy law is Chapter 11. Family farmers are able to reorganize under Chapter 12.

  • Professional Nationwide Consumer and Commercial Collection
  • Reasonable Rates, Consistently High Rates of Recovery
  • Bonded, Licensed and Insured
  • Online 24/7/365 Client Access & Client Support

Chapter 7

Chapter 7 is the type of bankruptcy most familiar to average Americans. All, or most, of a borrower's debts are wiped out after the borrower agrees to relinquish all non-exempt property. The Chapter 7 process takes between three and six months, costs $175 in filing and administrative fees, and usually requires only a single appearance in court.

Chapter 13

Chapter 13 is the reorganization bankruptcy for average consumers, requiring them to repay their debts in whole or in part. Those who claim Chapter 13 can keep their property but must use their income to pay their debts over a three-to-five year period. The minimum amount due is roughly equal to the value of all non-exempt property. In addition, a debtor must pledge all of his or her disposable net income — minus reasonable expenses — during the period when payments are being made. After the three-to five-year period, the balance of a borrower still owes is typically erased.

Non-Exempt Property

Non-exempt property refers to the property a debtor loses when he or she files for Chapter 7 or when a creditor sues and wins a judgment. Non-exempt property typically includes valuable clothing, electronic equipment, expensive automobiles, etc., as well as the equity in a house. Dischargeable debts are those that can be wiped out by entering bankruptcy. Most debts incurred prior to declaring bankruptcy are dischargeable, including medical bills, credit card bills and back rent.

Non-Dischargeable Debts

Non-dischargeable debts are those that cannot be erased by filing for bankruptcy. Someone who files for Chapter 7 bankruptcy will continue to owe these debts even after the filing has been processed. In the case of a Chapter 13 bankruptcy, all non-dischargeable debts have to be resolved in full by the time the agreed-upon repayment plan concludes. If any debts remain at the end of this time period, they remain the responsibility of the debtor. Good examples of non-dischargeable debts include alimony and child support, most income tax debts, many student loan debts, and debts owed for personal injury or death as a consequence of drunk driving.