The main reason anyone files for bankruptcy is debt; the need for an individual to discharge debt associated with them or their business is as a result of their inability to clear monies owed not only to creditors but to others that the court may deem to have a responsibility to, such as a spouse or child. How your debt will be treated by the courts will be determined by whether you file under Chapter 7 or 13. The difference between the two is determined by a number of factors; filing under Chapter 13 will require you to pay a portion of the debt, this means that a repayment plan is set up and the debtor is required to pay his debts on the basis as agreed upon in the plan. While filing under Chapter 7 will ensure that the majority of your debt will be discharged. Some debts under Chapter 7 will not be discharged; this will be illustrated in later on in this article.
When deciding whether to file under Chapter 7 or 13, you will have to define whether your debts are secured or unsecured? Secured debts are guaranteed by collateral, thus a loan secured by using assets as collateral falls under the category of a secured debt. If you file under Chapter 7, the creditor can and does have right to collect and sell collateral used to secure a loan by you the debtor, therefore affording them the opportunity to recoup monies owed to them by you. Under Chapter 13, you are able to retain your assets and a repayment plan is set up for you to deal with your debts.
Unsecured Debts: Non-Priority and Priority
Your file for bankruptcy will discharge a majority of your unsecured debts. Unsecured debts such as student loans, personal loan, credit cards and medical bills are classified as non-priority debts and will be discharged but priority claims even under Chapter 7 cannot be discharged. Priority debts or claims receive special treatment in bankruptcy cases and will always receive payment before other creditors do. Categories of priority unsecured debts are tax obligations, debts as a result of causing personal injury/harm or death as a result of driving drunk, child support, alimony among others. Therefore filing under Chapter 7 or 13 does not give a clear discharge of all debts
Chapter 7 or 13
In order to qualify for Chapter 7 you must have little or zero disposable income; if you make more than what your household generally requires then you may be asked to file under Chapter 13.
These are individuals who agree to pay your debt if you are unable to. Cosigners are often required in cases where the individuals have a poor or little credit history; this means that they are fully liable for the debts they cosign on. Thus if a debtor defaults, the creditor has every right to go for payment from the cosigner. If the debts of the borrower are discharged under Chapter 7 bankruptcy, the cosigner is still liable and must repay the debt and therefore filing under Chapter 13 will protect the cosigner from any debt obligations.