- Filing bankruptcy is a legal option that allows an individual debtor to receive legal relief for some or most of his consumer debts. It usually excludes student loans, child support, alimony, court fines and recent back taxes. Debtors can file either Chapter 7 or Chapter 13 bankruptcy on bills such as credit cards, medical expenses, personal loans, rent and utility bills. Whether the individual choose Chapter 7 or Chapter 13, a lengthy federal court process including extensive forms is required. In addition, creditors cannot legally pursue collections activity while either bankruptcy case is determined.
- Chapter 7 bankruptcy allows a debtor to be legally forgiven for his consumer debts. However, the debtor has to prove that he does not make enough money to pay his bills, which usually requires using an online federal means test (see Resources below.) This is the result of 2005 bankruptcy reform laws. Those seeking this kind of legal debt relief must also prove they completed a federally approved credit counseling session and provide extensive information about their income, assets, and debts. Chapter 7 usually allows filers to keep basic personal property and retirement accounts, but usually requires giving up assets such as interest in a house. A typical Chapter 7 bankruptcy filing can take six to eight months to complete and remains on a consumer's credit reports for 10 years. As of 2009, it cost about $300 to file Chapter 7 bankruptcy.
- Chapter 13 bankruptcy is a court-structured and supervised repayment plan for struggling debtors. While the same paperwork and credit counseling requirements that Chapter 7 filers have to conform to apply to Chapter 13, there is no income means test to pass. In addition, those under Chapter 13 will likely not lose property such as home equity or a vehicle, which can be an advantage to those needing extra help to get back on track.
Chapter 13 priority debts include student loans, taxes, child support, alimony and court fines, and all must be repaid in full over the duration of the plan. Those with medical and creditor debts may save a percentage of their original debt, especially since a Chapter 13 repayment plan takes only two to five years to complete. However, the debtor cannot get any new credit without court permission during the plan and may also be required to reduce some personal expenses such as entertainment. As of 2009, it costs about $275 to file Chapter 13 bankruptcy.
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