Bankruptcy is a legally enforceable form of debt relief. The vast majority of cases involve both a stay and a discharge. The stay, which suspends creditor collection efforts and legal actions, goes into effect after your case is filed with the court and remains in effect while your case is pending (barring a motion for relief). A discharge is then issued by the court which will eliminate certain types of debt.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was adopted into law in October 2005, and established a number of requirements intended to reduce abuse of the bankruptcy system. The key changes resulting from BAPCPA include the requirement of a pre-filing credit counseling course and a post-filing financial management course. In addition, debtors whose gross annual income is computed to exceed the state’s median income level must complete the “Means Test” to calculate their ability to repay debts.
In Chapter 7, the vast majority of your unsecured debts (credit cards, medical bills, payday loans, other personal loans, delinquent utility bills, civil judgments, etc.) are discharged – meaning you are no longer liable for repaying the debt. Certain debts cannot be discharged (like taxes, child support, and student loans). Secured debts, such as mortgages and auto loans, can only be discharged if you are willing to surrender the collateral.
In Chapter 13, your debts are consolidated and a structured repayment plan is proposed over the course of three to five years. Based on the different classifications of debt, some will be paid in full and others will be paid a percentage based on your ability to repay the debt. Interest may be reduced or eliminated completely depending on the class of debt.
Generally, I advise people to file Chapter 7 when possible. Chapter 7s are cheaper, easier, and faster. Chapter 13s are a long-term commitment and require adherence to a strict budget, and because of this, they tend to have a high failure rate relative to Chapter 7s. Nonetheless, some people need to file Chapter 13. Some make too much money, some are attempting to save their home from foreclosure, some filed bankruptcy too recently in the past., and others have too much property that could potentially be seized and sold by the Trustee. For these people, Chapter 13 offers better alternatives to the consequences that would result from a filing under Chapter 7.