Mountains of debt may seem insurmountable, but they can also fall quickly. Whether from medical bills, job loss, divorce or other circumstances, suddenly you're facing more debt than you can handle. Declaring bankruptcy could be what you need to get back on your feet and start over.
There are two main kinds of personal bankruptcy: Chapter 7 and Chapter 13. The kind that's right for you depends on several factors.
One of the main differences between Chapter 7 and Chapter 13 involves how much money you make. A so-called "means test" will compare your income with the average income in your state and determine your eligibility. If you're below the average state income, you're eligible for Chapter 7. If you're above it, you may still be eligible for Chapter 7, but a more complex calculation is necessary. Higher-income people with heavy debt typically must file for debt relief through Chapter 13 bankruptcy. Approximately 70 percent of consumer bankruptcies in the United States fall under Chapter 7, with the remainder being Chapter 13.
The assets you own are another thing to consider: personal property, real estate, bank accounts and other valuables. The goal of filing bankruptcy is to pay off as much of your debt as possible while letting you retain what you need to start over.
In a Chapter 7 filing--a liquidation bankruptcy--a trustee may have to sell some of your assets to reimburse your creditors. A common misconception is that this always involves selling your house or your car, but this may not be true in your case.
In a Chapter 13 filing--a reorganization bankruptcy--you can keep more of your property, but you're also expected to pay back a greater amount of debt directly to your creditors. This typically involves a payment schedule of three to five years, which a court will help determine.
Your Total Amount Of Debt
The amount you owe will also determine which kind of bankruptcy is appropriate. If your debt exceeds a certain threshold, your bankruptcy options may be limited to one kind or another. A personal bankruptcy attorney will be in the best position to assess this.
Your Financial Goals
Ultimately, the kind of bankruptcy you choose may come down to what your goals are. Chapter 7 filings tend to conclude much more quickly, often in a matter of months. The slate is wiped clean, and you can start over. However, you don't have the option of catching up on missed payments, which means that repossession or foreclosure could be in your future, depending on the exact situation. Chapter 13 lets you keep more of your assets, but the process is much longer and you will likely pay more.
Whichever kind of bankruptcy makes the most sense, remember that it's designed to help you in the long term, giving you as much freedom as possible during unfortunate circumstances. Your future is your own. That should give you hope.