The following is a summary of the bankruptcy options available to individuals or married couples in federal court. Most of the language is taken from documents available on the United States Courts website. If you would like more detailed information, visit the website at www.uscourts.gov/services-forms/bankruptcy. 

When considering bankruptcy, two options are available to individuals or married couples: Chapter 7, which involves liquidation (the sale of the debtor’s non-exempt property and the distribution of the proceeds, if any, to the creditors); and Chapter 13, which involves individual debt adjustment. Chapter 7 often involves people or corporations who have no assets, and is not commonly used by individuals. Most individuals file for bankruptcy under Chapter 13.

The court discourages Chapter 7 bankruptcy petitions unless the individual has essentially no assets and insufficient income to pay their debts as they come due.

In a Chapter 7 bankruptcy, the bankruptcy trustee gathers and sells the debtor’s nonexempt assets and uses the proceeds to pay creditors, so filing under Chapter 7 may result in the loss of property.

A Chapter 7 case begins with the debtor filing a petition with the bankruptcy court in their area, using forms available at the website. There are filing charges of about $350, which may be waived in cases of poverty. 

The code allows the debtor to protect some property from the claims of creditors if it is exempt under either federal bankruptcy law or the law of their state. This issue is best left to an attorney.

Filing a Chapter 7 petition automatically stops most collection actions against the debtor or the debtor’s property. This generally lasts for a short time, as the bankruptcy trustee will soon go ahead with the sale of any assets. 

The individual debtor’s primary concerns in a Chapter 7 case are to retain exempt property, if any, and to receive a discharge that covers as many debts as possible.

A Chapter 13 bankruptcy is called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Debtors propose a repayment plan to make installments to creditors over three to five years.

The most significant advantage of Chapter 13 is offering individuals or couples an opportunity to save their homes from foreclosure. By filing under Chapter 13, individuals can stop foreclosure proceedings and may cure delinquent mortgages over time. Nevertheless, they must make all mortgage payments that come due during the Chapter 13 plan on time. Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than the mortgage on their primary residence) and extend them over the life of the Chapter 13 plan. Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to the Chapter 13 trustee, who then distributes payments to creditors. Individuals have no direct contact with creditors while under Chapter 13 protection.

Any individual is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $336,900 and secured debts are less than $1,010,650.

No individual may be a debtor under Chapter 13 unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.

A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. A husband and wife may file either a joint petition or individual petitions, using forms available at the United States Courts website above. The filing fee of about $325 can be paid in installments with the court’s permission.

When an individual files a Chapter 13 petition, an impartial trustee is appointed to administer the case. Filing a Chapter 13 petition automatically stays (stops) most collection actions against the debtor or the debtor’s property. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payment. The bankruptcy court clerk gives notice to all creditors whose names and addresses are provided by the debtor.

Individuals may use a Chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the Chapter 13 petition. The individual may then bring the past due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition with the bankruptcy court. The debtor may also lose the home if he or she fails to make regular mortgage payments that come due after the Chapter 13 filing. 

Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 15 days. The plan must be submitted to the court and must provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.

There are three types of claims: priority, secured and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes. Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. Unsecured claims are those for which the creditor has no special rights to collect against particular property owned by the debtor.

The plan must pay priority claims in full unless a particular priority creditor agrees to a different treatment of the claim.

The plan need not pay unsecured claims (e.g., credit cards) in full as long as it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7.

Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making payments to the trustee. 

Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee either directly or through payroll deduction, which will require adjustment to living on a fixed budget for a prolonged period.

A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as the debtor certifies, if applicable, that all domestic support obligations that came due prior to making such a certification have been paid.

Debts not discharged in a Chapter 13 filing include certain long term obligations, such as a home mortgage; debts for alimony or child support; certain taxes; debts for most government funded or guaranteed educational loans or benefit overpayments; debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs; and debts for restitution or a criminal fine included in sentence on the debtor’s conviction of a crime. 

Rebuilding credit after bankruptcy is a slow process. The first step is to take a hard look at the factors that led to bankruptcy. If it was caused by excessive spending on things you did not really need, you need to make sure that you will not do that again in the future. On the other hand, if the bankruptcy was mainly caused by factors out of your control, such as job loss or illness, you will be more prepared to take the steps you need to rebuild your credit.

Bankruptcy lowers your credit score by about 200 points and remains on your credit report for ten years. Certain obligations remain even after bankruptcy, such as student loans, so it is critical that you pay these obligations on time. Likewise, if you have been able to preserve your home, you should pay any mortgage on time. These timely payments make their way onto your credit report. You should get a free copy of your credit report every year to see that you are being credited for timely payments of these obligations. The three credit reporting agencies are: Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.transunion.com).

The next step in rebuilding your credit after bankruptcy is getting a secured credit card. This credit card is different than a typical credit card in that it is secured by a deposit in a bank and usually has a low credit limit, at least in the beginning. It is very similar to a debit card, except that payments are made monthly rather than at time of purchase. Using a secured credit card for a few years and paying on time will allow you to apply for a conventional credit card.

Getting and paying auto loan on time will also help your credit, though your bankruptcy history will likely lead to a higher interest rate. When looking for an auto loan after bankruptcy, it pays to shop around for the best rate.

In a few years, if you make all your credit card and loan payments on time, you may get your credit score over 600, which will allow you to get better terms on an auto loan.

People who have been through bankruptcy can even buy a house. You can usually start this process about two years after the bankruptcy has been discharged.

Finally, beware of ads saying they can fix your credit score. They are scams. The only fix is paying your obligations on time and emerging from bankruptcy.