Bankruptcy by the Numbers

by John L Fischer, Personal Finance Writer   

File for Personal Bankruptcy

Over the years, "bankruptcy" has become a dirty word. But depending on your circumstances, filing for bankruptcy can still be your best option, especially if you need a fresh start financially.

You've probably heard of Chapter 11 bankruptcy before, but that's reserved for corporations. For you and other consumers, there are two main types of personal bankruptcy: Chapter 7 (a.k.a. "liquidation") and Chapter 13 (a.k.a. "reorganization").

Both types give you different options for settling your debts. And both require you to keep your "bankrupt status" for at least three years.

Personal bankruptcy at a glance: Chapter 7 vs. Chapter 13

If you think you need to file for bankruptcy, use this quick-reference table:

Bankruptcy
Type & Description		 What Happens
When You File?		 Items You Can Keep
Chapter 7
Liquidation or straight bankruptcy. This is the most common and traditional of all consumer bankruptcies. For you to legally declare Chapter 7 bankruptcy, you can't have any income.
  • A trustee is appointed and assigns a value to each of your assets.
  • All your assets are sold at auction to pay your creditors.
  • Exceptions — called "no asset cases" — do exist; they're usually settled within four months. (More traditional "asset" cases typically last 2-4 years after filing.)
 In complete liquidation, you don't get to keep anything. (There are bankruptcy exceptions by state, though).
Chapter 13
Reorganization. This less-traditional bankruptcy allows you to keep assets while you rebuild your income. (And you must have a regular income to be eligible.) Important note: Chapter 13 bankruptcies are often filed to save a house from foreclosure.
  • You can establish an interest-free repayment plan. (In Chapter 13, you can keep your assets based on how much you're earning.)
  • Your home
  • Any stocks you own
  • Car or cars
  • Personal items (like clothing, jewelry, and artwork), as long as the total value is less than $1,000

Bankruptcy rules say that you must apply for Chapter 7 or Chapter 13 bankruptcy — you can't do both. And your eligibility for each is based on your reported income when you file.