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Off to a Fresh Start: What Are the 2 Types of Personal Bankruptcy?

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Personal bankruptcy generally falls under chapter 7 or chapter 13. Both of these are ways to deal with significant amounts of debt and can enable the filer to reduce or eliminate their debts within a short period. Anyone who is considering filing for bankruptcy should determine which one applies to their situation and speak with a bankruptcy lawyer to get more information on what filing will entail.

Chapter 7 Personal Bankruptcy

The first option for personal bankruptcy is chapter 7 bankruptcy. Under chapter 7, it’s possible to have many debts discharged partially or completely. This means they no longer have to be repaid. However, it is necessary to use liquid assets where possible to repay the debt before the remaining amount is discharged. It is not required to use all liquid assets a person may own, as some can be exempt from being sold to repay the debts. This can include the person’s home and their main vehicle, as they need these to continue working and living. Some debts won’t be able to be discharged through chapter 7, so it’s important to consider the type of debts before filing for bankruptcy. Chapter 7 is the fastest type of bankruptcy and can be completed in as little as 6 months.

Chapter 13 Personal Bankruptcy

Those who make more money and owe higher amounts of debt might qualify for chapter 13 instead of chapter 7. In these cases, liquid assets do not need to be sold to cover the debts. It may be a good idea for the filer to sell some of their liquid assets to repay debts faster, but they aren’t required to if they qualify for chapter 13 bankruptcy. Instead, the filer will need to create a repayment plan to pay off as much of the debt as possible. The repayment plan generally lasts around three to five years, depending on the filer’s income and the amount of debt they owe. After this period is completed, debts that remain can be discharged. This type of bankruptcy does take longer, but it is available as a way for those who do not qualify for chapter 7 to still receive help to get out of debt.

Qualifying for Chapter 7 and Chapter 13

The type of bankruptcy the filer can use will depend on their income. They will need to pass a means test which determines if their income is lower than the median income for the state. This varies by location and based on the filer’s family size. Those who have an income lower than the median income for the state can file chapter 7, while those who have a higher income will need to file for chapter 13. Along with the means test, those who want to file for bankruptcy will likely need to go through credit counseling before they can begin the bankruptcy process.

If you owe a lot of money and are having trouble repaying all of it, you may be able to file bankruptcy. This is not a decision to be taken lightly, so speak with a bankruptcy lawyer before making any decision. They can give you more information on whether you need to file chapter 7 or chapter 13 and what to expect while you complete the bankruptcy process.

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