A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. In Chapter 7 proceedings, you do not pay anything to unsecured creditors included in your bankruptcy petition unless the court requires a liquidation sale of your nonexempt assets. (Nonexempt assets are those not protected from forced liquidation by either federal or state statutes. For example, under the federal statutes, each individual is allowed to exempt, among other things, $17,425 for real estate used as a primary residence, $2,775 for a vehicle, the right to state or federal benefits, and alimony and child support benefits.) If you own assets that are nonexempt, you may be required to liquidate them. The court would then distribute the proceeds from the sale to your unsecured creditors as partial satisfaction of the debts you owe. Any remaining unpaid debt would then be discharged, and you would no longer be held responsible for it.

Often known as a "wage-earner's plan," a Chapter 13 bankruptcy does not require liquidation of nonexempt assets to satisfy your creditors. Instead, you pay some or all of your unsecured debt back through the court over a 36- to 60-month period. The percentage of unsecured debt you are required to repay must be at least equal to what your creditors would receive if your nonexempt assets were liquidated as part of a Chapter 7 bankruptcy. If you successfully complete the court-ordered repayment schedule, any unpaid unsecured debt is then discharged.

If you wish to forestall and ultimately prevent foreclosure on real property (e.g., your home), you should seek to do so through Chapter 13. Although a Chapter 7 petition delays foreclosure, it does not prevent it without liquidation of the property to satisfy the mortgage debt. In Chapter 13, the petitioner may be given the opportunity to catch up in full on a mortgage arrearage as part of the 36- to 60-month court-approved repayment plan. If he or she does so, the foreclosure is prevented and the mortgage is brought up to date.