For some people, debt has become too out of control to find a resolution. In some cases, individuals and companies will turn to the bankruptcy courts for help. Bankruptcy laws are designed to help relieve debt while giving the debtor a second chance. Two common types of bankruptcy are Chapter 7 and Chapter 11.

Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy filing releases the debtor from responsibility from some or all unsecure debt. This includes debts such as credit cards and personal loans.

Chapter 7 Test

Before Chapter 7 Bankruptcy can be filed, the person filing bankruptcy is required to pass a test. The test examines the income of the individual to determine whether or not their income is sufficiently low enough so that it is not feasible for them to be held responsible for the debt.

Chapter 7 Liquidation of Assets

Under Chapter 7 Bankruptcy, the court has the right to seize any non-exempt assets belonging to the debtor. This property is then sold, and the proceeds are given to the creditors.

Chapter 11 Bankruptcy

Chapter 11 Bankruptcy does not eliminate debt but provides the debtor the opportunity to pay the debt back under a new payment plan. This plan is decided upon by the debtor, creditors and the court.

Who Files for Chapter 11 Bankruptcy?

Although individuals are sometimes allowed to file for bankruptcy under Chapter 11, it is typically only filed by businesses and corporations.

Restructuring for Individuals

Individuals are able to file for a restructuring of debt in a way that is similar to Chapter 11 bankruptcy. Most individuals file under Chapter 13 bankruptcy in order to do this.

Source:

U.S. Courts

Bankrate