- In a Chapter 7 bankruptcy, most of the individual's assets -- those not specifically exempted by law -- are sold off, with the proceeds distributed to creditors in proportion to their claims. Real estate such as a home is not usually exempt and thus will be lost by the debtor.
One this process is complete, all remaining debts are usually discharged, which means they are wiped clean. In the case of secured debts, the creditor may have the right to seize the asset used for security. In these circumstances, the creditor and debtor may reach a deal by which the debtor continues repaying the debt (even though it would normally be discharged) and the creditor agrees not to seize the asset as long as the repayments are made.
Chapter 7 usually is available only to people meeting one of three conditions: having a gross income below the state average; having a disposable income of less than $100 a month; or having a disposable income of between $100 to $166 a month and this not being enough to pay a significant portion of the outstanding debts. - In a bankruptcy under Chapter 13, the individual reorganizes his debts. With the court's help, the individual draws up a repayment plan. Usually this means paying all disposable income to the court, to be distributed to creditors. This repayment lasts for three years if the individual's income is below the state average, and five years if it is above. At the end of this period, remaining debts are discharged.
- Chapter 12 is a special form of bankruptcy for family farmers or family fisherman. It works in a similar way to Chapter 13, with two main differences. First, there is more flexibility about the repayments to take account of income being seasonal. Second, in the case of secured debts, the debtor may be allowed to repay over the original loan duration even if this is longer than the bankruptcy plan period; however, the debtor must have caught up with arrears on this loan by the end of the bankruptcy plan period.
- Chapter 15 applies to an individual also going through bankruptcy in another country. The foreign bankruptcy must form a more significant element of the person's financial affair to use these rules; otherwise the person must go through the full Chapter 7 or Chapter 13 process under the normal rules.
Under the rules, the U.S. court system cooperates as fully as possible with the foreign court. The rules allow foreign creditors to take part in U.S. cases in the same way as domestic creditors. The rules also specifically limit U.S. cases to deal with assets located in the U.S., meaning foreign courts do not have to establish jurisdiction over the debtor's overseas assets.
If a U.S. court recognizes the debtor's overseas bankruptcy case, the person automatically receives bankruptcy protection in the U.S., meaning U.S. creditors cannot seize assets or pursue the debts in court.