A bankruptcy is a legal proceeding that allows you to eliminate all, or a percentage, of your debts. When you file a bankruptcy, it immediately gives you protection under the federal bankruptcy laws and prohibits creditors from taking any further collection action against you. Once your bankruptcy is discharged, you are no longer compelled to pay any of the debts that were discharged by the bankruptcy court.
Chapter 7 bankruptcies are usually best if you do not have a considerable amount of assets, like substantial equity available in your home or other investments. This is because the Bankruptcy Trustee may liquidate your assets if it is not protected by your state’s bankruptcy exemptions. A liquidation can occur if and when the Trustee converts your assets to cash for distribution to your creditors. However, the vast majority of Chapter 7 cases are considered “no-asset” cases and no property is taken. It is important to consult with a local bankruptcy attorney to determine which assets can be protected.
Filing a Chapter 13 bankruptcy allows you to repay your creditors at a reduced percentage of your debt based on what you are able to repay. It also forces your creditors to accept repayment according to the terms set forth in a plan approved by the bankruptcy court. The main eligibility requirement for Chapter 13 bankruptcy is that you have a steady source of monthly income and an ability to repay at least a portion of your debts.