If you take a look at your finances and notice that you have more bills than you have income, you may realize that you need to do something to reclaim your financial stability. One option that you have is to file for bankruptcy.
Bankruptcy is a legal process that allows you to take control of your debt and work toward a fresh financial start. The exact way this happens depends on what type of bankruptcy you’re going to file. Chapter 7 and Chapter 13 are the two primary types of consumer bankruptcies.
Chapter 7 bankruptcy
A Chapter 7 bankruptcy is known as a liquidation bankruptcy. You must meet very specific means test standards to file a Chapter 7 bankruptcy. In this type of bankruptcy, you don’t have to make any payments to the bankruptcy court. The bankruptcy trustee has the option of liquidating certain assets, which are called non-exempt assets, to pay your debts. This is only done if the liquidation would cover a significant portion of the debts, so trustees often opt to bypass liquidation.
Chapter 13 bankruptcy
A Chapter 13 bankruptcy is known as a “wage earner’s bankruptcy.” The court will dive into your finances and determine how much money you can pay to the bankruptcy trustee with each of your paychecks or on a set schedule. The trustee takes that money and applies to the debts you have included in the bankruptcy. You’ll make payments for a predetermined length of time. Any balances remaining after you make all the required payments will be removed when the bankruptcy is discharged.
Considerations for both types of bankruptcy
When you file either form of bankruptcy, the court will issue an automatic stay. This prevents creditors from trying to collect money from you outside of the bankruptcy process. Because creditors are unlikely to receive payment in full, the automatic stay ensures none of them receive an unfair advantage by pushing the debtor for payments.
Once you file for bankruptcy, you can’t try to obtain new credit until the bankruptcy is discharged. The bankruptcy will negatively affect your credit score. You can begin to build that again once the bankruptcy is discharged.
You need to know your rights and responsibilities throughout the bankruptcy process. Working with someone familiar with how things work may be beneficial for you.