If you are unexpectedly laid off and cannot earn your normal wages you may suddenly find it difficult if not impossible to pay your mortgage, car loan or even utilities. This eventually leads to scary calls from debt collectors demanding payment for arrears you simply cannot afford.
Many people facing overwhelming debt like this choose to file for bankruptcy. There are two types of bankruptcy you can file for as an individual: Chapter 7 bankruptcy and Chapter 13 bankruptcy.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is also referred to as liquidation bankruptcy. Your nonexempt property will be gathered by a bankruptcy trustee who will then sell these assets. The proceeds from the sale are used to pay off your creditors. After the money runs out, most (but not necessarily all) of your remaining debts will be discharged.
It is important to note that you will not lose everything in a Chapter 7 bankruptcy filing. There are many types of assets that you will get to keep because they are exempt from the liquidation process.
Also, a Chapter 7 bankruptcy is “means based.” If your income is too high you may not be eligible for a Chapter 7 bankruptcy, and you will have to file for Chapter 13 bankruptcy.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is also referred to as a wage earner’s plan. Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy does not involve the liquidation of your assets.
Instead, the bankruptcy court will approve a plan you will follow to pay back your debts in installments for the next three to five years. Once the payment period is up, most (but not necessarily all) of your remaining debts will be discharged.
There is no income limit in a Chapter 13 filing. However, there is a debt cap that is adjusted each year to account for inflation. Your debts cannot exceed the debt cap limit for you to be eligible for Chapter 13 bankruptcy.
Which bankruptcy option is right for you?
Filing for bankruptcy is a complex legal process and one many people are not very familiar with. Because so much is on the line with a bankruptcy filing, oftentimes it is advisable to discuss your situation with a professional so you can move forward with the bankruptcy filing that is right for you.