The Two Types of Personal Bankruptcy

When you are unable to meet your obligations to lenders and creditors, the US constitution gives you the ability to relieve part or all of your debt. Close to 1.5 million people in the US file for bankruptcy every year. There are two basic types of bankruptcy chapters that can be use to discharge your debts. These are: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Under this type of bankruptcy, you will have part or all your liquid assets used to repay some of your debt. Liquids assets are those that can be converted into cash easily. The laws in each state define the type of assets that can be kept by the person who owes others and those that can be used to pay debts. Expensive personal items like paintings, watches, jewelry etc. can be sold to pay the creditors. However, you can be allowed to keep essential personal items like furnishings, appliances, books, animals etc. The liquid assets are turned over to the court. The court will then decide the best way to distribute them among the creditors as part of payment to the debts you owe. The remaining debt is then discharged.

Are you qualified for Chapter 7?

To qualify for chapter 7 bankruptcy, your income should be less than the mean income of your family size. The mean income varies from state to state. If it is above the mean income, you have no choice but to file for chapter 13. In addition, you will also have to visit an approved credit counseling agency to get credit counseling.

Advantages of Chapter 7 Bankruptcy

  • Can be used to completely eliminate unsecured debts
  • Creditors cannot contact your after the debts are discharged.
  • The process is quick, that is, you can have your debt discharged in just a few months.

Chapter 13 Bankruptcy

This type of bankruptcy allows you to repay part or all your debt based on an agreed payment plan. The repayment period is usually between 3 to 5 years. When filing for chapter 13 bankruptcy you have to submit your repayment plan to the court. A hearing will take place after a few weeks to approve your payment plan. The creditors may object to your payment plan but the judge has the final say. You will then have to repay your debts as stated in the plan. You will submit your payments to the court. The court will then pay your creditors. One you have completed your payment plan, all the remaining debt is discharged. Chapter 13 bankruptcy is usually used by people who have a regular income that can sustain their living expenses but cannot keep up with scheduled payments.

Are you qualified for chapter 13?

Chapter 13 is recommended for debts that are secured e.g. a car loan. It will allow you to continue paying your debts without being compelled to sell any of your assets. It is the better option if you do not want to lose any of your assets. Also, if your income is above the mean income for your family size, you will only be allowed to file for chapter 13 bankruptcy. You will also have to go for credit counseling before you file for chapter 13 bankruptcy.

The advantages of Chapter 13

  • You will have 3-5 years to repay your debts according to the plan that was signed buy you and the bankruptcy trustee.
  • You keep your property as you strive to settle past due debts.
  • During the protection period (3-5 years), you will have no direct contact with the creditors.

The Process of Obtaining a Bankruptcy Discharge

When applying for any of the types of bankruptcy, you will have to go through the following steps;

  1. Go for credit counseling from a credit counseling agency. The agency must be among those approved by the United States Trustee’s office.
  2. Look for a good lawyer to help you draft the paperwork. Explain your siyuation to the lawyer as it is. Do not hide anything.
  3. Provide proof of the income you have been earning for the past six months. This is required to determine your eligibility.
  4. File the paperwork in a bankruptcy court.
  5. Meet with United States trustee.
  6. Receive a final discharge of debts.

These are the general steps followed when filing for bankruptcy. However, they will vary depending on your situation and the state laws. While you can do this on your own, it’s sometimes best to consult with a bankruptcy lawyers, as they will be familiar with the bankruptcy laws in your state.

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