Bankruptcy is a legal process carried out to businesses and individuals to grant them freedom from their debts while providing creditors with an opportunity for repayment. It is a process carried out in federal court and is governed by the rules outlined in the U.S. Bankruptcy Code.
Bankruptcy offers people a fresh start, but it can damage your credit, making it hard to receive loans, and apply for a job soon. Therefore, before you file for bankruptcy, be sure that you have exhausted all other alternatives.
If you have, then considering bankruptcy is nothing to be scared of. The most important thing is to know what you are doing. This starts by understanding the types of bankruptcies available to you. For individuals, there are two main types.
Chapter 7 Bankruptcy: Liquidation
This type is the most common type of bankruptcy for individuals that is also known as ‘liquidation’ or straight bankruptcy. Individuals (and businesses with exceptional cases) with little or no assets file under Chapter 7 Bankruptcy.
This is because it allows them to dispose of their existing debts, such as medical bills and credit card bills. Those who have nonexempt assets such as collections with high valuations (family heirlooms, coin collections, stamp collections), second homes, stocks or bonds, and cash have to liquidate the items and property to pay off some of the debt.
People who file for Chapter 7 are typically selling off their valuables to clear the debt—people who do not have valuable assets but only have exempt property such as a personal vehicle. Household goods, clothing, and tools may not repay any of their unsecured debt.
An essential requirement for filing under Chapter 7 is that you do not have a sufficient income that allows you to pay at least a part of your debts. This determination relies on a mathematical calculation available through a form.
Chapter 13 Bankruptcy: Repayment Plan
This type of filing is for people who make too much money and so do not qualify for Chapter 7 Bankruptcy. It is also known as a wage earner’s plan. It is both used by individuals and businesses with a contact income.
It allows them to create a workable debt repayment plan/s. typically, these plans are in instalments paid over three to five years. In exchange for paying all their creditors, the court allows them to keep all their property and valuables including otherwise nonexempt property.
However, before the judge accepts the plan, your property will be under the watchful eye of the trustee. Before they take the idea, the judge and trustee will consider two main things: whether the creditors are being treated fairly and if each creditor will receive at least as much as if you had filed under Chapter 7 bankruptcy.
Chapter 7 vs Chapter 13
Both types of bankruptcy will give a bankruptcy discharge. This is a relief from your legal duty to repay your debts. While Chapter 7 cases do not have a repayment plan, Chapter 13 cases require you to repay some of your debt to creditors with a flexible payment plan.