“Chapter 7” bankruptcy is the most common type of bankruptcy in the United States. It allows a person to keep certain property considered exempt however these exemptions do not include auto loans. If a person declares “chapter 7” and has a car loan, the vehicle will be lost to repossession unless he/she pays the debt in full or reaffirms the loan. All assets that the person has will be sold by an appointed trustee to pay off creditors. The majority of unsecured debt, such as credit card bills will be discharged. A “chapter 7” bankruptcy stays on a person’s credit report for 10 years and will significantly affect their ability to get a loan or mortgage.
“Chapter 13” bankruptcy allows an individual to restructure their debt under the protection of the bankruptcy court. Unlike “chapter 7” bankruptcy, debts are not discharged. A person in “chapter 13” proposes a bankruptcy plan that pays his creditors back in a period that extends between three to six years. The bankruptcy court approves or disapproves a plan. In the majority of cases, creditors will end up getting paid but will be paid less than they were originally owed. Creditors cannot attempt to collect on debts while the reorganization is underway. This type of bankruptcy will also remain on a person’s credit report for up to 10 years.