Bankruptcy is a legal process that stops collection activity temporarily and can discharge some of the filer’s unsecured debts. There are multiple forms of bankruptcy that can help individuals and businesses dealing with aggressive debt collection or an unexpected downturn in income, and each has its unique benefits and drawbacks.
Some forms of bankruptcy are highly specific, like Chapter 11 proceedings for professional fishermen and farmers. Most individuals filing for bankruptcy will make use of either Chapter 13 or Chapter 7 bankruptcy proceedings. The specific kind of bankruptcy that someone files will determine what benefits and protections they receive and also what obligations they have.
Learning the basics about both Chapter 7 and Chapter 13 bankruptcy can help you choose the best solution for your situation.
Chapter 7
When people discuss personal bankruptcy, they often talk about Chapter 7 filings in particular. Liquidation bankruptcy filings are a fast solution to aggressive debt collection efforts. You can easily go from your initial filing to the discharge of your debt in under a year.
However, you will have to sell off or liquidate some of your personal property to pay your creditors. You can exempt some assets, but some of your property could end up at risk in a Chapter 7 bankruptcy. Those who have higher income levels may not be able to qualify at all for a Chapter 7 bankruptcy, as only those who have income levels comparable to the state median for their household size typically qualify for Chapter 7 bankruptcy.
Chapter 13 bankruptcy
Individuals who file for Chapter 13 bankruptcy can qualify with significantly higher income levels. Also called a wage-earners plan, Chapter 13 bankruptcy involves negotiating a structured payment plan for unsecured debts. Those who choose Chapter 13 proceedings don’t have to worry about selling off their assets to pay their creditors, but they will have to commit to three years or more of structured payments through the court.
Individuals who earn competitive wages and have more personal property may benefit from Chapter 13 proceedings, while those with fewer resources may benefit from a Chapter 7 filing. Learning more of the basics of bankruptcy can help you decide the best way to take control of your finances.