Dave Explains The Types Of Bankruptcy

Michelle wants to know the difference between the chapters of bankruptcy. Dave breaks it down in detail.

QUESTION: Michelle wants to know the difference between the chapters of bankruptcy. Dave breaks it down in detail.

ANSWER: Chapter 12 is a farm bankruptcy. A Chapter 11 bankruptcy is a very complicated and large bankruptcy. An individual or company goes into Chapter 11 reorganizes and sheds some of their debt, such as General Motors. K-Mart did it a few years ago.

The most common ones are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 7 is the atom bomb that wipes everything out, scorched earth. It allows you to keep some of your home equity depending on your state. In a Chapter 7, all of the unsecured creditors get nothing. For secured creditors, you either get to reaffirm the debt or give up the property, and the debt goes with the property.

Chapter 13 is a repayment plan. In all cases, you will pay child support, the IRS, and alimony with rare exceptions. You will also pay student loans. In a Chapter 13, you can take something such as your car that you’re behind on, pay a little on the amount you’re behind, and pay your regular payment to keep the car. You can also do this with a house. Unsecured debts—such as credit cards or medical bills—get a portion of what is owed to them based on a formula. It’s over a five-year period.

When you file a Chapter 7 bankruptcy, they run a means test on your income and assets. Based on that formula, if it’s determined that you can repay some of your debts, then you are forced to take a Chapter 13 instead of a Chapter 7.

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