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Consumer bankruptcy is divided into two categories: Liquidation, or Chapter 7 and Reorganization, known as Chapter 13.
Under Chapter 7 Bankruptcy, you may be required to sell some of your property to pay down your debt. However, much of what you own will be classified as exempt. For instance, your clothes, household furnishings, and a car are all exempt.
In return, most of your unsecured debt – such as credit cards, medical bills, etc. will be erased.
If you have secured debt – such as a car loan, you have a choice. You can allow the creditor to repossess; you can continue making your payments, or you can pay the creditor a lump sum equal to the current replacement value of the property.
Not everyone is eligible for Chapter 7. If your income is high enough to fund a Chapter 13 repayment plan, you’ll be required to file Chapter 13 instead.
Debts for child support, spousal support, and tax debts are not eliminated through bankruptcy.
Chapter 13 bankruptcy, also known as “wage earner” bankruptcy, requires that you have a reliable source of income that you can use to repay at least a portion of your debt.
The minimum amount you ’ll have to repay depends upon how much you owe, how much your unsecured creditors would receive if you filed Chapter 7 bankruptcy, and how much you earn. As a part of the filing, you’ll have to propose a repayment plan that shows how you’ll repay your debts over the next 3 to 5 years.
If you have secured debts, you’ll have the option to make up missed payments to avoid repossession or foreclosure. These missed payments can be included in your repayment plan rather than paid in a lump sum.