Bankruptcy is often known for giving people a fresh start. They’ve been dealing with a significant amount of debt for a long time. They’re in over their head, and they just need to eliminate that debt and start again. That’s when they file for bankruptcy.
For consumers, there are two main options: Chapter 7 bankruptcy and Chapter 13 bankruptcy. Both of these can create a fresh start, from a financial perspective, but they do so in very different ways.
A repayment plan
With Chapter 13, the debt is consolidated into a repayment plan. For instance, someone may have mortgage payments, car payments, credit card bills and medical expenses. They can’t afford to pay all of these off at the same time. But the repayment plan spreads them out over the next 3 to 5 years, based on their income level, and they can then pay off the debt as long as they make consistent payments every month.
Liquidation bankruptcy
With Chapter 7 bankruptcy, though, the requirements are different. The borrower has to provide a disclosure showing what non-exempt assets they own, and these are then liquidated. The money from the liquidation is used to pay off a portion of the debt. After that, if more debt still remains, it is forgiven. They don’t have a repayment plan, but have instead given up some of their assets in exchange.
Which option is right for you? It depends on your specific financial situation and whether or not you pass the means test for Chapter 7 bankruptcy. Take the time to carefully consider all of your options. It can help to work with an experienced law firm at this time.
