When your debts accumulate to a certain point that you cannot handle on your own anymore, you may have to declare bankruptcy. This is usually the last resort after you have tried several other options. Some of your debts can be discharged after bankruptcy but you may not be able to qualify for credit for a very long time. There are two personal bankruptcy options for consumers, these include;
1. Chapter 7 Bankruptcy
2. Chapter 13 Bankruptcy

Personal Bankruptcy Options For Consumers

01 Chapter 7 Bankruptcy

Chapter 7 bankruptcy allows debtors to discharge all or part of their debt. The condition attached to this option is the use of your liquid assets to repay your unsecured debts. Liquid assets are properties you own that can be easily converted to cash such as your home or car if you have equity. Most of your unsecured debt can be wiped out or discharged, in this bankruptcy option. However, child support, tax debts, and student loans can’t be bankrupt.

Your liquid assets must be turned over to the courts to be distributed among your creditors as partial repayment of the debt you owe. These are non-exempt assets. Assets that cannot be used to repay creditors are called exempt assets. Your state has laws that dictate which liquid assets are non-exempt and which are exempt.

After any non-exempt liquid assets have been distributed to your creditors, any remaining debt is discharged. You are no longer liable for any debt discharged. Furthermore, neither creditors nor third-party collectors can attempt to collect these debts from you.

How Do I Qualify?

To qualify for Chapter 7, you must pass a means test proving that your income is less than the median income for your family size in your state. If you fail the means test, you will not be allowed to file Chapter 7. Instead, you can file Chapter 13.

In addition to passing a means test, you must receive credit counseling from an approved credit counseling agency. You can find approved credit counseling agencies at the U.S. Trustee Program’s website.

02 Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, debtors repay all or part of their debt based on a payment plan. When you make the personal bankruptcy filing, you will also submit a repayment plan to the court. This plan usually lasts for three to five years. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn’t been approved.

After a few weeks, there will be a hearing to approve your payment plan. While creditors can object to the payment amounts, the judge has the final say. After your plan has been approved, you’ll continue making payments to the court. Once you’ve completed your Chapter 13 payment plan, any remaining debt is discharged. You are no longer liable for discharged debts.

Which bankruptcy option should I choose?

You might choose to file Chapter 13 instead of Chapter 7 if you have secured debt, like a car loan, that you want to continue paying. Since Chapter 7 bankruptcy requires you to give up certain liquid assets, Chapter 13 might be a better option if you want to keep these assets. Furthermore, if your income is above the median for your family size in your state, you will not be able to file Chapter 7 bankruptcy.

According to the U.S. Bankruptcy Code, to file Chapter 13, you cannot have more than $922,975 in secured debt and $307,675 in unsecured debt.

Filing Personal Bankruptcy

Since personal bankruptcy laws are so complex, it’s a good idea to seek advice from an attorney before filing for bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.