Bankruptcy may be an option you are considering if you are struggling with unmanageable debt. Filing for bankruptcy is often a smart move that allows you to start over financially and take control of your situation.
As you research the bankruptcy process, you may have questions about the different types of bankruptcy available, what each involves and which one is right for you. The two main types of bankruptcy filed by consumers are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy
Chapter 7 bankruptcy allows you to discharge all qualifying debt. Discharge means the debts are erased and you are no longer responsible for them.
Only certain debts qualify for Chapter 7 bankruptcy. Child support, alimony and student loans generally cannot be discharged in bankruptcy. However, credit card debt, medical debt or other types of personal debt typically qualify for discharge.
If you own a home, keeping your home may be a priority. You have a bigger risk of losing your home or other real estate by filing Chapter 7 bankruptcy.
The bankruptcy court will examine your assets and debts. If you own assets that could be used to pay the debts, such as a home, the court may order you to sell those assets.
Therefore, Chapter 13 may be a better option for you if you have a home that you are worried about losing.
Chapter 13 bankruptcy
Chapter 13 bankruptcy does not discharge your debts right away. Instead, you pay off the debts through a three-to-five-year payment plan.
The bankruptcy court appoints a trustee to oversee and manage your payment plan. You make monthly payments to the trustee, who pays your creditors according to the plan. After the final payment is made under the plan, the remaining debts are discharged.
Chapter 13 bankruptcy can prevent you from losing your home since you are not required to sell any assets to pay your debts. If you are behind on mortgage payments, they can be added to your Chapter 13 plan. Otherwise, you will need to keep making your monthly mortgage payments while making your Chapter 13 payments.
You must have income to qualify for Chapter 13 bankruptcy because you must show that you are able to make monthly payments. Your payment plan can be modified if your circumstances change during the payment period. You must report any changes in income to your trustee. This includes increases in income as well as decreases in income.
What happens if you miss Chapter 13 payments?
Although your home could be at risk if you file for Chapter 7 bankruptcy, having your debts be immediately discharged makes it an attractive option. Chapter 13 bankruptcy requires you to stick to a payment plan for several years.
If you miss payments under your Chapter 13 plan, the bankruptcy court could dismiss the bankruptcy, which allows creditors to begin contacting you again. The court may also convert the bankruptcy to Chapter 7.
Deciding between Chapter 7 or Chapter 13 bankruptcy depends on your specific situation. You should thoroughly review your current financial circumstances, your bankruptcy goals and future plans before committing yourself to one or the other.