Bankruptcy is a legal process that provides a way to reduce or eliminate certain debts, offering a chance at a fresh financial start.
When considering bankruptcy, it is essential to understand your options. Most organizations and individuals choose either Chapter 7 or Chapter 13 bankruptcy. These forms of bankruptcy each offer distinct benefits and disadvantages.
Chapter 7 is an option available to many individuals and business entities. Eligibility typically depends on income, which must fall below the state’s median or pass a means test. This form of bankruptcy is the most common. In 2021, 288,327 people filed for Chapter 7 bankruptcy, while only 120,002 opted for Chapter 13.
Chapter 7 bankruptcy aims to discharge most unsecured debts within three to five months, providing a clean slate for those who qualify. You should consider Chapter 7 if you have mostly unsecured debts or lack significant non-dischargeable debts. It is also a good option if you have a lower income or cannot commit to a three-year repayment plan. Chapter 7 bankruptcy has a few drawbacks, such as the potential sale of nonexempt property and a long-lasting impact on your credit report for up to ten years.
Chapter 13 bankruptcy is suitable for businesses, including sole proprietors, as well as individuals who may not qualify for Chapter 7 due to income. This option requires a three to five-year reorganization plan to pay off debts. Debtors can typically keep their property, even if it is facing foreclosure.
You might consider Chapter 13 if you have multiple mortgages or non-dischargeable debts. Chapter 13 may also benefit you if you owe debts to an ex-spouse or need to safeguard specific assets. However, Chapter 13 comes with several difficulties, including a longer debt discharge timeline, added administrative complexity and the need for consistent repayment during the plan.
While bankruptcy is a challenging journey, you can navigate the path to financial recovery and a fresh start with the right approach.