Although no one wants to file for bankruptcy, it can sometimes be a good option if you have mounting debts to repay. Although there are many different bankruptcy codes, they all can be divided into two basic categories: liquidations and reorganizations. If you are an individual filing for bankruptcy, you will most likely be looking at chapter 7 bankruptcy—or liquidations; or, you'll be looking at chapter 13 bankruptcy, which is a reorganization. Here are the basics of both and their pros and cons.
What Is Chapter 7 Bankruptcy?
One great benefit after you file for bankruptcy is that the court will issue an automatic stay, meaning that people you owe money to will be barred from harassing you with visits, letters, or phone calls.
Chapter 7 bankruptcy can also give you great relief because most of your debts can be cleared by the courts, with the exception of child support, student loans, and back taxes/other government debts. Still, if you have a lot of debt, wiping the slate clean on debt that can be forgiven is a huge benefit.
However, you should be aware that wiping the slate clean will still require some sacrifices. Arguably the biggest downside of chapter 7 is that it will damage your credit score for about ten years, meaning that loans could be much more difficult to secure in the future. And since you are struggling to pay your debtors, chapter 7 bankruptcy will require you to sell assets to pay off some of your debts. You may have to sell a second vehicle, stocks, bonds, coin collections, etc., to make these payments. Once your assets have been liquidated, the rest of the debt that you cannot pay back is discharged, or eliminated by the courts.
Keep in mind that even though you will have to sell assets to pay debts, you will not be stripped of everything. Bankruptcy law protects certain exemptions, like a vehicle that you use to drive to work and other personal property.
What Is Chapter 13 Bankruptcy?
Unlike chapter 7 where your assets are liquidated, chapter 13—also known as a "wage earner's plan"—is a way for you to reorganize your debts into manageable payments. These reorganizations can help you partially repay debts and, in some cases, pay off all the debt. While chapter 7 can stay on your credit report for 10 years, chapter 13 bankruptcies will typically stay on your report for about seven years.
One great benefit of chapter 13 is that you will be able to save your house from foreclosure, and you may be able to fix delinquent mortgage payments. While filing for bankruptcy can help you save your home from immediate foreclosure, keep in mind that you will have to still make your future mortgage payments on time.
One downside of chapter 13 is that fewer individuals can qualify for it. For instance, your unsecured debts have to be less than $394,725 and your secured debts have to be less than $1,184,200. You also have to have sufficient disposable income and be current with your tax filings.
However, if you qualify for chapter 13, then it is certainly worth looking into. A bankruptcy attorney can help you come up with a repayment plan and help you reorganize your debts so they are more manageable. Once your plan has been submitted, you'll start making payments to a trustee who will then distribute the funds to your creditors. These reorganized payments usually last between three to five years. However, if circumstances arise that prevent you from completing your repayment plan—and these circumstances were out of your control—the court may be able to grant you a hardship discharge.
Since filing for bankruptcy can be a stressful time, it's a good idea to talk with an attorney who can help you file a petition, whether you choose to go with chapter 7 or chapter 13 bankruptcy.