If you’re feeling overwhelmed by debt, bankruptcy may offer a fresh financial start. But choosing the correct type of bankruptcy is critical.
For most people, the decision is between Chapter 7 and Chapter 13 bankruptcy. Both offer relief from creditors, but they differ in key ways.
Liquidation or repayment
Chapter 7 bankruptcy is also known as “liquidation bankruptcy.” It quickly eliminates unsecured debt, such as credit cards and medical bills. You may be able to keep some of your assets from being sold by using state or federal exemptions.
Chapter 7 bankruptcy is typically completed in about three to four months. However, you must pass the means test, which compares your income to the average income of other New Jersey residents with the same household size (currently $163,817 for a family of four. If you have limited income and are unable to repay creditors over time, then Chapter 7 may be your best option.
Chapter 13 bankruptcy is commonly referred to as “reorganization bankruptcy.” Rather than wiping out all of your debt immediately, it allows you to repay some or all of your creditors through a court-approved repayment plan over a course of three to five years.
Chapter 13 is more suitable for people who earn a steady income and want to protect valuable assets, such as a home facing foreclosure due to missed mortgage payments. Most or all of any unsecured debt left at the end of the payment plan is discharged.
Both Chapter 7 and Chapter 13 bankruptcies offer you the protection of an “automatic stay.” Once you file, creditors are required to stop contacting you, thereby ending harassing phone calls.
The biggest difference between the two chapters is how debt is handled. Your income, type of debt, assets and long-term financial goals all play a role in determining which one is best for you. It’s essential that you speak with someone with bankruptcy law knowledge. Filing under the wrong chapter can lead to a dismissed case or long-term financial setbacks. You need someone who can evaluate your situation, explain your options and help you choose the path that gives you the best chance at a fresh financial start.
