Filing for bankruptcy can be confusing and overwhelming. You might be experiencing pressure from your creditors, fear for your family’s well-being and hopelessness as your debt continues to worsen. To add to all the stress, you may not know what is best for you and your circumstances. Learning the difference between the two main types of bankruptcy can help you understand your options and plan for your future.
Chapter 7 basics
Chapter 7 bankruptcy is a type of liquidation bankruptcy. This means that most of your assets — property, luxury items or vehicles — can be sold to pay off your debts. However, one common misconception about Chapter 7 is that you will lose everything you own. This isn’t necessarily the case.
Exemptions are specific laws that help protect some of your assets, including your home, personal belongings and vehicle. The trustee appointed to your case may only sell assets that are non-exempt, so filing for bankruptcy is not a guarantee that you will lose all your belongings.
Individuals and business entities are eligible to file for Chapter 7 bankruptcy. Generally, any person with an income lower than the state median level may file. If your income is above the state median, you may have to complete a means test to see if you qualify. If you are unable to pay back some or most of your debts, Chapter 7 bankruptcy might be an option for you.
Chapter 13 basics
Chapter 13 bankruptcy is known as reorganization bankruptcy. In this type of bankruptcy, your assets will not be sold in order to pay off your debts. Instead, a court sets up a repayment plan for you to pay your creditors a portion of your debt over a fixed amount of time. This allows you to catch up on missed payments without having to give up your property.
Once you successfully complete your repayment plan, a creditor may discharge any remaining unsecured debts like credit card bills. This means you’re no longer required to pay off the debts.
Chapter 13 bankruptcy is ideal for individuals who earn a regular income and have enough left over each month to pay back a portion of their debt.
How can filing for bankruptcy help?
Filing for bankruptcy can be stressful. But knowing which type of bankruptcy is right for you can put you on the path to debt relief and give you a fresh financial start.