When debt overwhelms you, and you are unable to reasonably make payments to creditors, bankruptcy can help you get control over your finances. This legal process can eliminate certain types of debt, or it can reorganize debt into a payment plan with clearly defined terms and obligations.
If you want to pursue bankruptcy, you will need to decide between chapter 7 and chapter 13. Here are a few key factors to consider when weighing your options.
Chapter 7
With chapter 7, the court discharges certain types of debts, including debt accrued through credit cards, medical bills, or personal loans. Most people can retain the primary property, such as a home and vehicle. However, liquidation of other property occurs to pay off creditors.
People pursuing chapter 7 must show they are eligible for the process. This entails presenting evidence that your income is below the median level where you live. You must also take a means test. If you are not eligible, you may need to file for chapter 13.
Chapter 13
Unlike chapter 7, chapter 13 does not involve debt discharge. Instead, it reorganizes debt into a payment plan with a specific repayment term. In most cases, the repayment term spans from three to five years. While certain types of debt, such as mortgage payments, require full remittance, you will only have to pay a percentage of credit card bills or personal loans.
There are fewer eligibility requirements when filing for chapter 13. In 2021, you must have less than $394,725 in secured debts and less than $1,184,200 in unsecured debts to file. However, these numbers do change from year to year.
While bankruptcy does have an impact on your credit history, it is more than worth it when you consider the clean financial slate it affords. Once the process is complete, you can set about rebuilding your finances and working towards the future.