It’s challenging to go about your life with a mountain of debt looming over you. From harassing calls from creditors to using credit cards or retirement funds to afford your necessities, massive debt is a heavy burden to bear.
If you’ve exhausted all of your options but still haven’t found relief, filing for bankruptcy can help you get a fresh start and back on your feet. Bankruptcy is a legal process that allows you the ability to relieve all or a portion of your debts when you can no longer afford to pay it off yourself.
For individuals, the two primary forms of bankruptcy commonly filed are Chapter 7 and Chapter 13. Each type of bankruptcy has specific monetary requirements that determine whether or not you are qualified.
However, filing for bankruptcy is a significant and often confusing decision. By understanding the most common types of personal bankruptcy, you can make an informed decision when you are ready to take the next step.
Chapter 7 bankruptcy
Chapter 7 bankruptcy, sometimes called liquidation bankruptcy, is the most common type of bankruptcy filed in the United States. In this type of bankruptcy, the court sells your assets to pay off your debt – or as much as possible. The money from your assets is used to pay the creditors and lenders you owe.
To qualify for Chapter 7 bankruptcy, you have to pass a means test that proves your income is less than the median income for your family size in your state of residence. The process for filing for Chapter 7 typically goes quicker than Chapter 13; however, there are some drawbacks.
State laws determine which assets are exempt from liquidation and which are non-exempt. Exempt items may include essentials like your house or car, but it will depend on your unique circumstances.
Chapter 11 bankruptcy
In Chapter 11 bankruptcy, also known as reorganization bankruptcy, the court will not liquidate your assets. Instead, a three to five-year repayment plan is set up for you to pay off all or part of your debt. Once you have completed the plan, you are no longer responsible for paying off any remaining debt.
If you have concerns about keeping your assets, Chapter 13 may be the right choice for you – even if you qualify for Chapter 7. However, to be eligible for Chapter 13 bankruptcy, your secured and unsecured debt must not exceed a specific amount. In general, Chapter 13 is best for when you can afford to pay some but not all of your debts.
Filing for bankruptcy isn’t an easy decision, but it can bring much-needed financial relief. If you are drowning in debt, it’s essential to know that you have options.
