When most people think of the word bankruptcy, they imagine a consumer or business running out of money and having to get a federal bankruptcy court to step in and cancel all debt. This is the type of bankruptcy that most people think of, but many consumers get confused by the various names, such as Chapter 7, Chapter 13, Chapter 11. What do they all mean and which of these plans require a payment plan? ?
Chapter 7 bankruptcy does not require any type of payment plan. Why? Well, Chapter 7 bankruptcy is what most people think of. This is sometimes known as direct bankruptcy because you are trying to get rid of your debt completely without having to pay anything. It is also known as liquidation because you may be forced to sell certain assets in order to pay off as much of your debts as possible.
However, in practical terms, most people do not have many assets. In fact, about 95% of all bankruptcy filings do not involve asset cases. This means that the people who file the return do not have anything that is not exempt, or what they own is simply not worth looking for.
What types of assets are out of reach of creditors? Well, your home is usually exempt, but the details vary depending on which state you live in. For example, a state like Texas offers an unlimited homestead exemption, which means your creditors can’t go after your home no matter how much it’s worth. Although, of course, you still have to pay your mortgage.
Just to clarify, Chapter 13 is a kind of bankruptcy where you have to make a payment plan for the next three to five years. If you’re wondering what those other chapters refer to, they generally apply only to businesses or special circumstances, such as the bankruptcy of a farmer or fisherman.
