With rising prices on everything from groceries to housing, sometimes borrowers are not able to pay what they owe through no fault of their own. They may want to consider filing for bankruptcy.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is usually used by borrowers with limited income and assets, although it is also available to businesses. To qualify for a Chapter 7 bankruptcy, the borrower must meet certain financial criteria and pass a means test. The means test compares the borrower’s income to the median income in New Jersey.
Before filing for bankruptcy, the borrower must complete credit counseling. Then, they will need to provide detailed information about their finances, so it is helpful to gather tax returns, bank statements, a creditor list, income, expenses and pay stubs in advance.
Once this is done, they can file the bankruptcy petition, after which the court issues an automatic stay. This means that creditors are prevented – at least temporarily — from collecting on the debt.
A bankruptcy trustee will be appointed and the borrower must complete a debtor education course, which provides financial management education. If all of the requirements are met, the court will issue a discharge order which eliminates liability for the debt.
Chapter 13 bankruptcy
Chapter 13 bankruptcy is usually used by borrowers who can afford to repay their debts over a 3-5-year period. It requires the borrower to have a regular source of income.
The process generally follows the same course as Chapter 7 bankruptcy as it relates to filings, gathering financial information and credit counseling. However, Chapter 13 borrowers will make monthly payments that will then be distributed to their creditors.