Bankruptcy can be a way to get a new start after debts from being unemployed, getting a divorce or having major medical bills have become too much. However, not all bankruptcy filings are alike. The two most common types of bankruptcy in the U.S. are Chapter 7 and Chapter 13, but there is a world of difference between the two. The one that's right for you will depend on your current income, your assets and the extent of your debts.
About Chapter 7 bankruptcy
Chapter 7 bankruptcy is the most common type of bankruptcy in the United States. Approximately 69 percent of all cases filed are Chapter 7 bankruptcies. This type of bankruptcy is also referred to as "liquidation" or "fresh start" bankruptcy. Essentially, under this type of bankruptcy, all of your assets are sold to pay off your debtors. What debts can't be covered with the proceeds from selling your assets are generally discharged (or written off). There are exemptions in Chapter 7 bankruptcy. For instance, you can generally keep your home, one car and a reasonable amount of personal possessions. Things like boats, second homes and motorcycles, however, usually have to be sold.
About Chapter 13 bankruptcy
Chapter 13 bankruptcy, on the other hand, is "reorganization" bankruptcy. In this type of plan, you pay back the majority of your debts over a five-year-period. In Chapter 13, you create a pay-back plan that includes monthly payments to a court-appointed trustee. When this plan is approved by the bankruptcy judge, you make monthly payments to the trustee in addition to your regular mortgage, taxes, car payment and other expenses. The major difference in this type of bankruptcy is that you get to keep the majority of your assets, even things like second homes, boats and motorcycles. This type of bankruptcy is well-suited to individuals who have been unemployed but are now working or to people who have been off work because of an illness but are now recovered and back at work.
The type of bankruptcy you choose depends on your financial situation, your assets and your income. Since the paperwork for filing either type of bankruptcy is rather lengthy, it's a good idea to consult an attorney who specializes in such cases. Many attorneys offer a free initial consultation. With Chapter 13 filings, you can usually fold your attorney fees into the repayment plan, so you don't have a large initial outlay of money.Share