Different scenarios lead to unmanageable debt – the kind that grips you and just won’t let go. Using credit cards as a personal bank account and living beyond your means, divorce, unrelenting medical bills, and unemployment are all common scenarios that leave to massive debt and seeking-out debt-relief options.

Bankruptcy used to have a bad name, but that’s no longer the case as millions of people have come to see that it’s a very viable and safe option to clear up debt and start financially fresh. 

Consumer bankruptcy will severely impact your credit score from 7 (Chapter 13) to 10 (Chapter 7) years. Still, after a few years of acting financially appropriate and showing that you can manage money correctly without the added baggage, you can begin to seek out a secured credit card to start rebuilding your credit score.

The question is, which consumer bankruptcy option fits your unique situation? The answer has to do with your amount of disposable income and the totality of your debts.

Chapter 7: Liquidation bankruptcy

Chapter 7 is for individuals who don’t have the amount of disposable income necessary to put toward their debts. To qualify, the relief seeker must take their state’s Chapter 7 means test, which measures one’s disposable income and determines approval for liquidation bankruptcy. 

If approved, you won’t have to pay your debts in cash. Instead, some of your non-exempt property (usually not your primary home) may be liquidated to pay off your lenders but, this is rare.

Chapter 13: Reorganization bankruptcy

Reorganization bankruptcy is better suited for those who can afford a repayment plan, but the key is that you must be able to make the recurring payments. To qualify for Chapter 13, your unsecured debts (credit cards, medical bills, utility bills) cannot exceed $394,725 or $1,184,200 in secured debts (mortgages or car loans).

Bankruptcy is a big decision, so take your time to decide. If you do choose bankruptcy as your debt relief solution, you’ll be making a wise choice for your future finances. Take the time while your credit is recovering and educate yourself on financial literacy, how to set and follow a budget and how to make money work for you.