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Bankruptcy FAQ

Understanding the types of personal bankruptcy

On Behalf of | Feb 29, 2024 | Bankruptcy

Overwhelming debt, a job loss or a medical emergency might force a person to consider the possibility of bankruptcy. While the prospect may fill an individual with anxiety, this legal option can provide protection and offer relief when a household needs it most.

While the United States Bankruptcy Code lists six different types of bankruptcy, there are two main types that individuals should consider when looking to manage their debt. A person’s circumstances dictate which option to use.

Chapter 7: Liquidation

Chapter 7 is what most people think of when talking about bankruptcy. This process liquidates most of a debtor’s assets to pay off creditors. Upon successfully completing the process, the courts discharge most unsecured debts, freeing the debtor from the obligation to cover them.

At the same time, this process protects certain types of property. The primary residence, personal belongings and tools of the trade may be exempt from liquidation. Chapter 7 typically takes three to six months, making it one of the quickest forms of bankruptcy relief.

To qualify for Chapter 7, a person must pass a means test. This procedure compares a debtor’s average monthly income to the state median income and sees if the person has enough disposable income to pay for debts after covering life’s necessities. If the income is low or there is not enough money to pay off debts, the individual likely qualifies for Chapter 7.

Chapter 13: Reorganization

A person who does not qualify for Chapter 7 might be able to file Chapter 13 bankruptcy. This process involves creating a court-approved repayment plan to repay all or a portion of debts over three to five years. This arrangement may allow the debtor to keep assets while repaying liabilities.

Chapter 13 can help prevent foreclosure on a home or repossession of a vehicle. Upon completion of the repayment plan, the court discharges qualifying debts, but other obligations, such as certain taxes and domestic support, may require full repayment.

Most people do not plan to go into bankruptcy and might fear the consequences. However, this provision can be an excellent way to start over when one’s financial obligations become overbearing.