There are two main types of bankruptcy for individual consumers. You may qualify for both of them or you may be limited to the type of bankruptcy that does not discharge your debt. Explore both options to decide which bankruptcy, if any, you could file.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is commonly known as discharge bankruptcy. At the end of Chapter 7 bankruptcy, the court may discharge most or all your debt.
You might wonder why everyone doesn’t file Chapter 7 bankruptcy if it means you might not have to pay your debts. Well, before your debts can be discharged in Chapter 7 bankruptcy, the court evaluates all your assets and decides if any of them can be sold to satisfy your debts. Assets might include a house, car or other valuables. Some assets may be though.
One thing that makes it difficult to file Chapter 7 bankruptcy is a means test. In 2005, a law was passed requiring bankruptcy filers to pass a means test proving their current monthly income (as defined in chapter 7 of title 11 of the United States Code) is below their state’s median income. If your income is too high and you still want to file bankruptcy, you’ll have to file Chapter 13 bankruptcy. Some people file Chapter 13 bankruptcy even though they qualify for Chapter 7.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is commonly known as a repayment bankruptcy where you pay all or some of your debt in a three to five year repayment plan. Chapter 13 bankruptcy might be beneficial if you’re behind on your mortgage or car loan and you want to get caught up and keep the asset. If you can keep you your regular loan payments and the bankruptcy payment, you might avoid foreclosure or repossession.
People who don’t qualify for Chapter 7 bankruptcy because they don’t pass the means test could file Chapter 13 bankruptcy. If you’ve already filed, your Chapter 7 case will be converted.
You’ll typically have to create a repayment plan, submit it to the court for approval, and start making payments to your bankruptcy trustee. Your trustee then divides up your payments and sends them to all the appropriate creditors. At the end of Chapter 13, the debt you have remaining is typically discharged.
With both types of bankruptcy, you’re required to get pre-bankruptcy credit counseling within six months before you file bankruptcy. If you fail to get credit counseling, your bankruptcy case could be dismissed. Once you file bankruptcy, you’re given an automatic stay which forbids any additional collection activity on your debts. That means creditors and collectors can no longer call you about those debts. However, if the foreclosure or repossession process has already started, bankruptcy may not permanently prevent it.
Debt settlement is often considered a good alternative to Chapter 13 bankruptcy since debt settlement may result in you paying less on your debts and typically does not show as long on your credit report.