Sometimes, bankruptcy is the only way to get out of debt. Most filers in Michigan choose Chapter 7 or Chapter 13, which both remove debt but work differently.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is a liquidation procedure that involves converting non-exempt assets, such as second homes, into cash to pay debts. The court assigns a trustee to the case to manage the sales and divide the proceeds among unsecured creditors. Unsecured debt, such as medical bills and credit cards, are forgiven, and the consumer only owes reaffirmed secured debts. If the consumer completes all of the requirements, they should receive a discharge in four to six months.
Consumers who file Chapter 7 bankruptcy must pass the means test, which compares their income to the median income for a same-size household. If their income is above the median, the court figures their disposable income, which is the remaining income after the deduction of allowed expenses. If the consumer fails both parts of the means test, they cannot file Chapter 7 and must file Chapter 13.
Chapter 13 bankruptcy
Chapter 13 bankruptcy involves the consumer devising a repayment plan to submit to the court for approval. The filer commonly has three to five years to pay the debt, and payments depend on the nonexempt asset value and their income. However, the consumer must not have more than $1,184,200 in secured debts and no more than $394,725 in unsecured debts.
They commonly don’t have to sell assets as long as they make the required payments and repay at least the value of the asset. They can include mortgage in arrears or missed vehicle payments in the repayment plan to catch up, but bankruptcy doesn’t remove liens. This means they must keep current on payments to avoid losing the property, but filers can strip junior liens on real estate.
Bankruptcy prevents collection actions from creditors temporarily under the automatic stay. While bankruptcy offers a fresh start, it affects credit for several years, so consumers should study all their options.