It can be discouraging to file for bankruptcy. But in some circumstances, it may be your only financial protection. Reports show that 399,269 Americans filed for personal bankruptcy in 2021. This is a decline from previous years.
It’s important to understand bankruptcy in-depth to avoid costly mistakes. Here are two things to know when filing for bankruptcy.
Differences between Chapters 7 and 13
Both Chapters 7 and 13 are in the U.S. Bankruptcy Code, but they are different. Chapter 7 is primarily for liquidation and 13 is for reorganization. Therefore, with Chapter 7, you can sell nonexempt assets to pay off your debts, whereas, with Chapter 13, you will make a monthly repayment plan and retain ownership of some of your assets.
Chapter 7 is quick as the process takes four to six months. Chapter 13 can be completed between three and five years. Further, Chapter 7 will stay on your credit report for 10 years and Chapter 13 stays for seven years.
Individuals with limited income who only have unsecured loans like personal loans, medical bills and credit cards should consider Chapter 7. But you need to pass a means test to be allowed to file for this bankruptcy option.
If you have a regular income and would like to protect some of your assets, Chapter 13 could be your best option.
Not all debts will be discharged
Filing for bankruptcy won’t discharge certain debts, such as student loans, child and spousal support, tax debts, most fines and penalties, auto loans and mortgages. You may need to develop a plan to pay them.
It is important to know when you need to file for bankruptcy. Ensure that you get adequate information to make the right calls.