There are numerous different types of bankruptcy filings, known as chapters. The most common for consumers are Chapter 7 and Chapter 13.
Both of these can address outstanding debt issues, but they do so in many different ways, so it’s important to know how they work. Below is a quick overview of some of the differences to begin breaking down this process.
Chapter 7
With Chapter 7, a person has to liquidate their assets. There are many exemptions for things like tools of the trade, a primary home, a primary vehicle and the like. But non-exempt assets need to be liquidated, and then the money from the sale is used to pay off a portion of the debt. If there is still debt remaining, then it is forgiven, giving the filer a fresh financial start. Creditors still get paid, but perhaps less than was owed.
Chapter 13
With Chapter 13, however, people do not have to liquidate any of their assets. They can keep everything. Instead of forgiving the debt or paying it off immediately, the Chapter 13 filing creates a repayment plan. If someone has overwhelming debt that is immediately due, it can be put into a repayment plan for 3 to 5 years. As long as they make their payments correctly, this spreads their debt out and makes it affordable.
Exactly which filing is right for you depends on your situation, your income and if you pass the means test. But either one can be helpful in the right situation, so it’s very important to understand exactly what legal steps you can take at this time.
