Because each person’s financial situation is different, it is difficult to answer these questions without first taking the time to fully understand the circumstances that brought you to this point. Some debtors have the ability to repay some or all of their debts if they are given the opportunity to reorganize their debts into a manageable repayment plan. On the other hand, some debtors do not have any funds available to pay creditors after paying for their basic living expenses. This is the purpose of having different types of bankruptcy, so that debtors may find relief under the bankruptcy code according to their specific financial needs.
Most often, the first step in answering this question is to schedule a bankruptcy consultation with the experts. After a thorough discussion about your finances, attorneys will recommend the best option to solve your debt problems based on your circumstances and eligibility requirements. The fear and stress associated with filing bankruptcy causes nervousness and uncertainty about taking official steps toward debt freedom. Taking the time to understand your options and discuss with an expert will help qualm those fears, relieve your stress and give you confidence in making the right decision.
Types of Bankruptcy for Consumers
In order to help you understand some of the basics of bankruptcy, below are general descriptions of the two most common types of bankruptcy filed by individuals.
Chapter 7 Bankruptcy
Debtors who file a Chapter 7 case must first meet income requirements to qualify to file under this chapter of bankruptcy. To qualify for relief under Chapter 7, the debtor’s income must be below the median income for a household of the same size in the area in which the debtor resides. If your income is above the average median income and you cannot show special circumstances that justify additional expenses or adjustments to monthly income, the case will be dismissed or converted to a Chapter 13 case.
If you meet the income requirements and all other requirements under the Bankruptcy Code to be a debtor under Chapter 7, a bankruptcy trustee will be assigned to your case to review your debts and determine if you own any assets that the trustee can sell to pay your creditors. Most Chapter 7 cases are “no asset cases” meaning that there is not sufficient equity in your assets after applying liens and exemptions. Therefore, in most cases, debtors retain their property while discharging their unsecured debts.
Chapter 7 bankruptcy is best suited for debtors that meet the income requirements and have little to no equity in non-exempt assets. Typically, debtors who file Chapter 7 have a negative income - - their allowed living expenses exceed their income before adding payments for unsecured debts. A Chapter 7 case discharges most unsecured debts (i.e. credit cards, medical bills, personal loans, etc.) and gives you a fresh start to recover from a financial problem. However, if you owe alimony, student loans, taxes or other non-dischargeable debts, those debts will survive the bankruptcy and still be your responsibility.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is also known as a reorganization because it provides you the opportunity to reorganize your debts into a manageable repayment plan. To qualify for a Chapter 13, you must demonstrate that you have sufficient income to pay for basic living expenses and repay all or a portion of your debts through a Chapter 13 bankruptcy plan. Chapter 13 is a good option for individuals who:
- Do not meet the income requirements for a Chapter 7 case or who have equity in assets that they want to protect from creditors or a bankruptcy trustee
- Have non-dischargeable debts such as taxes, student loans, alimony or child support as these payments may be included in the repayment plan and spread out over a three or five-year plan
Chapter 13 bankruptcy cases are also used when debtors are facing home foreclosure or vehicle repossession because it can stop the foreclosure and repossession. This allows you to pay the past due payments through the repayment plan and keep your home or car. Chapter 13 bankruptcy cases are well suited to individuals who have the ability to pay some or all of their unsecured debts, but need help to reorganize those debts into a manageable monthly payment. Most Chapter 13 plans only pay a percentage to unsecured creditors saving you thousands of dollars in debt payments and interest.
Because there are several types of bankruptcy cases available, it is best to consult with an experienced bankruptcy attorney before deciding which chapter of bankruptcy will benefit you the most. The goal of filing a bankruptcy is to place you in position for a fresh start so that you can begin to recover and rebuild after a serious financial crisis. Schedule your free bankruptcy consultation to see how bankruptcy, Chapter 7 or 13, can help you.
