Bankruptcy

Bankruptcy is a legal process that helps people or businesses who are unable to pay their debts. It allows you to get relief from some or all of your debts while offering a chance to make a fresh financial start. In the United States, individuals most often file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often called “liquidation bankruptcy.” It is designed for individuals who have little or no ability to pay back their debts. When you file for Chapter 7, a court-appointed trustee may sell some of your assets to pay your creditors. However, certain assets are considered “exempt,” meaning you can keep them. These exemptions vary by state but often include essential items like your primary home, car, or personal belongings.

In most cases, Chapter 7 bankruptcy can eliminate unsecured debts such as credit card bills, medical bills, and personal loans. However, it does not erase all debts, such as student loans, child support, or certain taxes. The process typically takes about 3-6 months to complete, and at the end, most of your qualifying debts will be discharged, meaning you are no longer legally required to pay them.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is known as “reorganization bankruptcy.” It is for individuals who have a steady income but are struggling to keep up with their debt payments. In Chapter 13, you propose a repayment plan to the court, allowing you to pay back some or all of your debts over 3 to 5 years. This option lets you keep your property, even non-exempt assets, as long as you stick to the repayment plan.

Chapter 13 is often a good choice if you are behind on mortgage or car payments and want to avoid foreclosure or repossession. At the end of the repayment plan, any remaining qualifying debts may be discharged.

Which Option is Right for You?

The decision to file for bankruptcy and which chapter to file under depends on your financial situation, income, and goals. Chapter 7 might be better if you have little income and no significant assets to protect. Chapter 13 could be a better option if you have steady income and want to keep your property while paying back your debts over time.

Filing for bankruptcy is a big decision with long-term consequences, including a negative impact on your credit score. It’s important to consult with a bankruptcy attorney to fully understand your options and make the best choice for your situation.