The legal process overseen by federal courts, bankruptcy is a system designed to help individuals and businesses discharge debt accumulated. This process can be used to eliminate all or part of the said debtor to repay a smaller portion of what they owe.

Filing for Bankruptcy can help you find relief, but it is important to be aware that declaring bankruptcy can have many risks including and not subject to long-term effects on your credit. The effects of filing for bankruptcy can remain on one’s credit report for up to ten years. It may also affect your ability to get approved for loans with more favorable rates.

Chapter 7 Bankruptcy

The form of bankruptcy that most people think of when considering filing is what is known as “Straight Bankruptcy” or Chapter 7.  This type of bankruptcy requires the filer to have a trustee from a federal court to supervise the sale of any assets that aren’t exempt. Certain assets, such as cars or work-related tools, and basic household furnishings may be exempt. All profits from the sale are then put towards your debt and once the remaining balance is discharged it is eliminated. Although Chapter 7 is a powerful option, it can’t eliminate all types of debt. You may still have to pay back student loans, some taxes, alimony, and child support.

Overall Chapter 7 can give you a significant chance to change your life, it is also extremely risky. You will most likely lose property; your credit score will be decimated and will remain on your report for up to ten years. Lastly, if you get into debt once again, you cannot file again for at least eight years.

Chapter 13 Bankruptcy

Another type of popular bankruptcy, Chapter 13 works by allowing you to keep your property in exchange for partially or completely repaying your debt by paying on your debt for three to five years. Depending on what’s negotiated, any remaining debt is thus eliminated or discharged at the end of the plan, even if you only repaid part of what you owe.

Compared to Chapter 7 or other types of bankruptcy, Chapter 13 may be the more favorable option. Typically, you repay only part of your debt and you may be able to retain some of your assets. Also, Chapter 13 does not remain on your credit report for as long as other forms of bankruptcy, and you can file again in as little as two years.

Although bankruptcy can eliminate a lot of debt, it cannot eliminate all forms of debts. The following are types of debts that typically cannot be discharged.

• Most Student Loan Debt
• Court-Ordered Alimony
• Court-Ordered Child Support
• Reaffirmed Debt
• A federal tax lien for taxes owed to the U.S. Government.
• Government fines or penalties
• Court fines and penalties

Bankruptcy Terms to Know

The following is a comprehensive live of legal terms particular to bankruptcy proceedings that you will come across during court proceedings:

• Bankruptcy Trustee – A person or corporation, appointed by the bankruptcy court that acts on behalf of the creditors. After reviewing the debtor’s petition, liquidates (sells) your property under Chapter 7 filings, and then pays the creditors. Under Chapter 13, the trustee oversees a repayment plan negotiated upon between the courts and the filer.
• Credit Counseling – Before filing for bankruptcy, any filer is required to undergo counseling with a non-profit agency. All filers, upon undergoing bankruptcy must complete a course in-person financial management before the debt can be discharged. Typically, all filers are required to undergo these things, but in certain circumstances can be waived.
• Discharged Bankruptcy – Under Chapter 7, this occurs all non-exempt assets have been sold and creditors paid. Under Chapter 13, it means the filer has completed the time period of the repayment plan. This only happens once the bankruptcy proceedings are complete.
• Exempt Property – This pertains to certain assets owned by the filer, such as cars, tools connected to the filer’s job, etc. Depending on what state you reside in, determines what you are allowed to keep.
• Lien – The creditor is allowed to hold and sell the debtor’s real estate properties for either security or to repay the debt.
• Liquidation – This sale of the debtor’s non-exempt property is used to pay the debt.
• Means Test – A test required by the courts to demonstrate if the debtor has the ability to repay their debts. It also used to curtail abuse of the bankruptcy code. The test itself accounts for the debtor’s income, assets, expenses, and unsecured debt. If the debtor fails to pass the means test, if filing for Chapter 7, maybe dismissed and converted into a Chapter 13 proceeding.
• Reaffirmed Account – Specific to Chapter 7,  the debtor may agree to continue paying a debt that could be discharged. This “reaffirms” the account and your commitment to paying off your debt. This is usually allowed so the debtor can keep a piece of collateral, such as a vehicle that otherwise could be sold to pay the debt.
• Secured Debt – This is any debt that the creditors can seize such as a home backed by a mortgage or a car backed by an auto loan in case you default on your loan.
• Unsecured Debt – Such as a credit card balance, this is debt that has no tangible collateral.