Personal Bankruptcy: Law & Types

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  • 0:02 Bankruptcy
  • 0:43 Bankruptcy Law
  • 1:17 Chapter 7 Bankruptcy
  • 2:53 Chapter 13 Bankruptcy
  • 4:50 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has extensive experience as a prosecutor and legal writer, and she has taught and written various law courses.

There are several different types of bankruptcy, but only two are designed for individuals. This lesson explains these two types: Chapter 7 and Chapter 13 bankruptcy.


What happens if you simply cannot pay your debts? Many people consider filing for bankruptcy, but what exactly does that mean?

Bankruptcy is a legal term. A bankruptcy ruling means a court makes a legal determination that a debtor cannot currently repay the debts he or she owes. A bankruptcy ruling allows the debtor the legal right to reorganize his or her debts. It can also sometimes allow him to discharge, or dismiss debts. Of course, this is helpful to the debtor, but it is also designed to benefit creditors, the institution that is owed money by a debtor. Bankruptcy helps creditors because it enables them to collect some of what they are owed.

Bankruptcy Law

Let's take a closer look at the laws governing bankruptcy. There are different types of bankruptcy, designed for different types of debtors. However, all bankruptcies are governed by Title 11 of the United States Code. Title 11 is a collection of federal laws known as the Bankruptcy Code. Because they are federal laws, the bankruptcy process works generally the same in all states.

The types of bankruptcy are commonly referred to by their Bankruptcy Code chapter number. The two types used for personal bankruptcy are: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most common type. To qualify for this, a debtor must first prove that his income is insufficient to pay off debts. Next, a bankruptcy court will appoint a trustee for the debtor's estate. The trustee is responsible for liquidating the estate. A liquidation means the debtor's assets are sold, and the proceeds are distributed to his creditors. Exempt assets aren't sold in the bankruptcy process; the debtor gets to keep them. Exemptions can vary from state to state, but normally include life necessities such as household appliances, some clothing, and one car. Everything else is considered to be a non-exempt asset and will likely be sold in order to cover the debtor's debts. This includes stocks, antiques, vacation property, recreational vehicles, and second cars.

After liquidation, creditors are paid in a particular order, known as priority. The order is set out in the Bankruptcy Code. Due to priority, some creditors might be paid in full while some might not be paid at all. For example, the law requires tax bills to be paid before credit card bills.

The Chapter 7 process takes about four to six months, from the time the debtor files bankruptcy to the time his debts are forgiven. However, not all debts will be dismissed. A debtor must still pay obligations like child support and student loans, even after bankruptcy. A Chapter 7 bankruptcy will be noted on the debtor's credit report for 10 years. During this time, it can be difficult for the debtor to open new accounts or secure a new job.

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