Sometimes people accumulate personal debts beyond their ability to pay. Sometimes the only solution is to declare bankruptcy. The U.S. Bankruptcy Code has two methods for individuals to settle their debts, Chapter 7 and Chapter 13.
Chapter 7 bankruptcy, commonly called straight bankruptcy, comprises about 80 percent of the consumer filings. The most drastic method of settling financial problems, it involves liquidating, or selling, the debtor's non-exempt property and possessions and distributing the proceeds to the creditors. Most people who file Chapter 7 do not have many non-exempt assets.
Upon filing for Chapter 7 bankruptcy in bankruptcy court, a person places his assets under the protection of the court and submits a Statement of Financial Affairs describing his background and financial history. The court notifies the person's creditors of the filing, and collection efforts stop.
The person also submits to the court schedules of all his assets and liabilities. Assets include real property (such as real estate), personal property (household goods, clothing, retirement funds, cash, etc.), and all other assets. Liabilities include priority debts (taxes), secured creditors (auto dealers, home mortgages, etc.), and unsecured creditors (credit cards).
Bankruptcy law allows the person to exempt some assets from liquidation. Under Mississippi law, a person may exempt $10,000 of specific types of personal property; insurance payments on exempt property; income from disability insurance; most payments under a qualified pension, profit-sharing or similar retirement or disability plan; and the debtor's homestead up to the value of $75,000 over and above any mortgage amount.
For secured debts such as a car loan or home mortgage, the debtor must continue to make payments on those loans to keep the asset. Otherwise, the creditor may petition the court for permission to repossess the asset.
A trustee receives all the person's non-exempt assets, sells the items, and distributes the proceeds to creditors. The trustee pays administrative claims first and in full then priority claims, including taxes. Unsecured creditors receive proportionate payments based on the amount of remaining proceeds versus the total debt owed.
Following distribution of the proceeds--or approximately 60 days after the meeting of creditors if there are no non-exempt assets--the court discharges or dismisses the debtor from paying any remaining balances on the unsecured debts. A record of the bankruptcy remains on the debtor's credit history for 10 years.