Bankruptcy is confusing and even frightening to many people. If you don’t understand how bankruptcy works, you might overlook both benefits and risks associated with filing.
One of the most important decisions regarding bankruptcy that you will make, other than realizing you need bankruptcy protection, is determining what form of it bankruptcy to file. Most individuals who file for bankruptcy will either seek Chapter 7 or Chapter 13 bankruptcy protections.
Knowing the differences between these two can help you make a more informed decision about which would be a better option.
Chapter 7 bankruptcy is meant for low-income, lower-asset households
If you want to file Chapter 7 bankruptcy, you have to qualify for it first. You will have to pass a means test that involves adjusting your income for certain expenses and then comparing it to the state median income for your household size.
If you qualify for Chapter 7 bankruptcy, you can receive a discharge without any obligation to repay your debt. However, the courts may require you to liquidate certain assets in order to repay creditors before your discharge. You can protect or exempt some property, including some of the equity in your home and in a personal vehicle.
Amounts owned above exemptions are subject to liquidation in a Chapter 7 filing. Once you receive your discharge, the public record of your bankruptcy will stay on your credit report for 10 years.
Chapter 13 bankruptcy gives you a chance to repay your debts
For those whose income is too high to qualify for Chapter 7 bankruptcy or have personal property that they don’t want subject to liquidation, Chapter 13 bankruptcy can be a good option. It involves working with the courts to create a repayment plan.
You will typically need to make at least three years of payments on this plan to qualify for a discharge. Instead of paying all of your creditors separately, you make one payment through the courts. Chapter 13 bankruptcy gives you an opportunity to renegotiate major debts, like car loans and mortgages. Once you finish your repayment plan, the discharge from your Chapter 13 bankruptcy will stay on your credit report for seven years.
If you don’t know which form of bankruptcy would be better for your situation, discussing your finances with an experienced bankruptcy attorney can help you make more informed decisions that maximize the benefits you receive from filing.