Deciding to use bankruptcy protection to deal with overwhelming consumer debt is just the beginning. From a consumer standpoint, “bankruptcy” generally refers to two types of proceedings for paying off, reducing and/or eliminating your debt: Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Depending on factors like your household income, the nature of your debts and how much you owe, you might qualify for both. But one type of consumer bankruptcy is likely going to be more useful for you than the other. Before filing, you need to know how Chapter 13 and Chapter 7 work and what the differences between them are.
Chapter 13 bankruptcy (a.k.a., reorganization bankruptcy)
Chapter 13 bankruptcy is used by people who earn above a certain amount of income. Rather than dissolving some or all of your debts, Chapter 13 reorganizes your existing debts into affordable monthly payments that last three to five years. You can ask the bankruptcy judge to reduce your interest rates or forgive some of the debt, but the focus is on negotiating and preparing a repayment plan the court will accept.
Probably the greatest advantages of Chapter 13 bankruptcy are 1) there is no income limit test to qualify for, and 2) you get to keep your property. However, you are expected to make your payment every month, no matter what happens, such as sudden unemployment. And it takes years to complete.
Chapter 7 bankruptcy
As opposed to reorganization bankruptcy, Chapter 7 bankruptcy is known as “liquidation bankruptcy.” Consumers use Chapter 7 to eliminate some or all of their debts in exchange for them liquidating much of their property to pay off as much of their debt as possible. Certain property is exempted from liquidation, such as part of the value of your home and personal property like your furniture and appliances.
Chapter 7 is much faster than Chapter 13, but you must pass a means test to show you don’t have the resources to pay the debts yourself. It can also cost you your current home, car and other major assets.
Your unique debt problems need carefully tailored advice from someone who knows how bankruptcy law applies.