Life Crisis: Bankruptcy

Bankruptcy Types

Individuals may file for one of two kinds of bankruptcy - Chapter 7 (liquidation) and Chapter 13 (repayment).

Chapter 7, the bankruptcy court forgives most debts that are not secured by assets or property (such as a house or car). In addition, you are allowed to retain certain "exempt assets." Under Chapter 7, a court-appointed trustee takes possession of non-exempt property, arranges for its sale or liquidation and is responsible for paying as many of your debts as possible with the proceeds. (Not all debts can be erased by bankruptcy.)

Chapter 13, sometimes referred to as "wage earner repayment plan" bankruptcy, may be the only choice if the court determines you have the income to repay your debts. Filing for Chapter 13 bankruptcy allows you to pay your debts in installments over an agreed-upon time period, usually three to five years. The court must approve your plan to repay all or part of the money you owe. Many people who want to keep property, such as a house or car, turn to Chapter 13.

New Means Test Determines Chapter 7 Versus Chapter 13
All bankruptcy filers are subject to a means test based on income and expenses to determine if they must file for Chapter 7 or Chapter 13.

Possible Increase in Attorney Fees
Besides the means test change, the bankruptcy laws may spur an increase in the costs associated with filing for bankruptcy. Since there will be more paperwork to complete, it is likely attorney fees will increase. The fee increase could make filing for bankruptcy cost prohibitive for some people.

For more information about the new bankruptcy laws, visit