Which personal bankruptcy option is best for your situation?

When considering bankruptcy, you may have several options. The option you choose depends on your individual situation.

In this blog, we will go over the differences between the two most common types of bankruptcy: Chapter 7 and Chapter 13.

How do they work?

Chapter 7

When you file a Chapter 7 bankruptcy you are asking the bankruptcy court to discharge your debt. There is no payment plan. Creditors only get paid if you own assets that are not exempt. Exempt assets include a few thousand dollars in a checking account, furniture, clothes, some equity in your house and car, and other basic possessions that most people own.  To qualify, you must pass the “means test,” which looks at your household income and expenses. Chapter 7 is what most people file to get a fresh start and discharge their consumer and business debt quickly.  It takes about 3 months to get a Chapter 7 discharge.

Chapter 13

Chapter 13 is a reorganization bankruptcy. Under this chapter, you propose a repayment plan to pay back a portion of your debts.  The amount you must pay back is determined by the means test (your income and expenses) and the value of your assets. A Chapter 13 repayment plan lasts from 3 to 5 years. Chapter 13 is often used to stop a foreclosure, to pay back taxes, and to pay back a portion of credit card debts and loans.

What happens to your assets?

One of the biggest differences between these two forms of bankruptcy is what happens to your assets. While Chapter 7 allows you to discharge debts quickly and get a financial   fresh start, you may not qualify if you have too much equity in valuable assets like stocks or investment properties. IRAs and 401Ks are generally protected in Chapter 7.

A Chapter 13 bankruptcy allows you to keep your property no matter its value. In exchange, however, you must pay the creditors an amount no less than the value of your nonexempt assets.

Bankruptcy does not have to be feared

Filing for bankruptcy can help you discharge debts and find a new financial start without collection calls and lawsuits. The first step is to make a list of your debts, your most valuable assets, and your monthly income and expenses.

While this article is meant to be informative, you should speak to an experienced bankruptcy attorney for legal advice.