Declaring bankruptcy is a major decision that should only be made after exploring all feasible options of debt repayment. While bankruptcy can eliminate most debts under the protection of the federal bankruptcy court, it will not alleviate one from tax liabilities, child support, or spousal support. It can also have damaging effects on your credit report for 7-10 years, making it very difficult to borrow or receive any kind of credit in the future.
The two most common types of bankruptcies for individuals are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is also known as “liquidation bankruptcy”. A trustee is assigned to your case, and they will sell any significant nonexempt property in order to repay your creditors. Property that may be exempt from liquidation can include real estate, clothes, trade or professional tools, and a number of other items.
A typical Chapter 7 bankruptcy case takes several months to complete, and you must pass what’s known as a “means test”. Basically, if you earn a high income you may not be eligible to file Chapter 7 and may have to use Chapter 13 instead.
Chapter 13 Bankruptcy
Unlike Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, or “reorganization bankruptcy”, requires no liquidation of your belongings. Chapter 13 allows you to repay all or some of your debts to creditors through a structured repayment plan over the course of 3-5 years. Since you have to repay your debts, you will have to prove that you can afford to meet your payment obligations. Also, your secured and unsecured debt must be below a certain dollar value in order for you to file.
Before you file for bankruptcy, consider alternatives for managing your debt, and learn what will happen to your debts and property in bankruptcy, so there are no surprises. It’s best to seek legal counsel or advice from professionals who can evaluate your situation and help you make the right decision.
