Personal Bankruptcy: What You Need To Know

Personal Bankruptcy

You are very likely familiar with the concept of bankruptcy, but you may be less familiar with the fact that there are actually three different types of bankruptcy you can file as an individual. Millions of Americans file for bankruptcy every year, whether they have overspent, lived outside of their means, or been faced with a devastating financial event, such as enormous medical bills.

Before you are able to file for bankruptcy, you will be required to meet with a credit counselor. This person will walk you through all your options and may even help you come up with a plan to repay your debt without having to file for bankruptcy. However, if it turns out that filing is your best option, you’ll want to know the two types of individual bankruptcy and what they will mean for your financial future.

Chapter 7

What is it?

When an individual files for Chapter 7 bankruptcy, they are asking to have all or part of their debt discharged after their liquid assets are used to pay some of the existing debt. Liquid assets are anything easily converted to cash, such as the contents of a checking or savings account. Each state has different laws about which types of accounts are exempt from paying debts under these circumstances, so it’s best to ask your credit counselor about this before you file.

Why would I need it?

If your income is on the low side (less than the median family income in your state), you would qualify to file for Chapter 7. Your liquid assets would then be used to repay as much outstanding debt as possible. Much of the rest would be discharged. (Usually student loans cannot be discharged, but under certain circumstances, they can be.)

Chapter 13

What is it?

Under Chapter 13 bankruptcy, you are simply asking your creditors for some time and space to reorganize your debts and work on paying them down. Corporations often file for a similar type of bankruptcy, and it often helps save them from going under completely. As an individual, it can be the thing that saves you from losing everything you currently have. Of course, it will still have an effect on your credit, so should be considered as a last resort when possible.

Why would I need it?

If you do not pass the means test (your income is the same as or greater than the median family income in your state), then you will only be eligible to file for this type of bankruptcy. Under Chapter 13, you will get to keep many of your possessions (such as your home and car) and continue to pay down the debts associated with them, but in a more structured way.

Chapter 11

What is it?

Similar to Chapter 13, Chapter 11 bankruptcy helps filers free themselves from overwhelming debt by allowing creditors to work with individuals to come to an agreement about the amount that will be paid.

Why would I need it?

It may seem that Chapter 11 bankruptcy should be listed before Chapter 13, but in reality, Chapter 11 is reserved for those who have exceeded the debt limits set forth in Chapter 13. So if you have more than that, and must still file for bankruptcy, you may only qualify to file for Chapter 11.

If you’re considering filing for bankruptcy, then you might already understand how it will affect your credit for many years to come. Before going through with filing for bankruptcy, consider delving into credit repair first. It could be a better alternative you haven’t explored.


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