- Chapter 7 bankruptcy is commonly known as liquidation, a process in which an individual or corporation's property is sold off and used to pay off debts. Though the specific types vary from state to state, some types of property are not required to be liquidated to pay off debts. Most areas allow individuals to keep all or most of the equity in their homes and some personal property of great sentimental value, like wedding rings. Chapter 7 bankruptcy will not get you out of all types of debt. You will still be required to pay student loans, alimony payments, child support, debts incurred through fraud and criminal fees. Filing for Chapter 7 bankruptcy will damage a credit rating badly and will remain on record for 10 years.
- Chapter 13 bankruptcy is also called debt adjustment. It gives you time to plan and implement a way to repay some or all of your debt. Paying off the debt in a period of three to five years is generally the goal of this plan. During the debt restructuring period, debtors are not allowed to foreclose on mortgages or take collection action against you. However, the filer must continue to make payments on outstanding debts while this process is taking place. Since Chapter 13 does not eliminate debt altogether, it is generally not as hard on your credit rating as Chapter 7. In order to qualify for Chapter 13 bankruptcy, you cannot have more than $336,900 in debt.
- Filing for "Chapter 20" is done by filing for Chapter 7 bankruptcy, then Chapter 13. The aim here is to reduce the filer's total debt to under $336,900 through Chapter 7, in order to qualify for Chapter 13. Filing for Chapter 13 bankruptcy will allow the filer to restructure his remaining debt into a more manageable payment plan. Filing for chapter 20 is a long process, however, as it is illegal to file for Chapter 13 less than three years after you have filed for Chapter 7. Filing for Chapter 20 is often seen as a scam in the courts. Judges will be careful to determine that the filing is made in "good faith."
- Filing for Chapter 20 must be done in good faith.Justice image by MVit from Fotolia.com
Determining whether a filing is made in good faith depends on a variety of circumstances, like: How much time passed between the Chapter 13 and Chapter 7 filing; how much of the debt the filer proposes repaying; previous bankruptcy filings; the filer's honesty; unusual circumstances facing the filer; and whether filing for Chapter 20 will have a result that could not be obtained by filing for Chapter 7 or 13 individually.
Filings made in bad faith will are generally tossed out of court, though appeals are possible. - If a Chapter 20 filing is successful, the filer will have been released from the majority of his debt above $336,900, prevented debtors from claiming some of his more important assets like his house, and established a manageable payment plan for the remainder of his debt. His credit rating will be very poor and he will have very little personal property remaining, but the overall reduction in debt load will ideally mean he is able to be debt free at some point in the future.
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