When you file for bankruptcy, you have more than one option, and each one suits different circumstances more appropriately.
Chapter 7 and Chapter 13 bankruptcies are the most common. However, they differ primarily based on what will happen to your property.
What is Chapter 7 bankruptcy?
A Chapter 7 bankruptcy is also known as liquidation bankruptcy because you liquidate assets to pay off your debts. This option is often best suited for people that are not homeowners. Anyone may file a Chapter 7, but the court determines eligibility based on a means test.
The means test ensures that anyone who files does not have the income to pay off debts without bankruptcy. The formula includes the calculation of your average income over a period of six months and your monthly expenses. The remaining amount is disposable income. A high disposable income would likely disqualify you.
What is Chapter 13 bankruptcy?
A Chapter 13 bankruptcy differs from Chapter 7 in that you retain ownership of your property as long as you complete a payment plan designed by the court. Anyone, even self-employed individuals, may qualify for a Chapter 13 as long as the debts amount to less than $394,725.
Payment plans under a Chapter 13 are between three and five years. During that time you make monthly payments based on your court-approved plan, and your final result is likely a discharge or some or all of your debt. This option is best for families with assets, income, and heavy debt.
Bankruptcy may sound intimidating, but for some, it is the only option to help establish financial stability.