Whether you have encountered unforeseen financial challenges or you have built up a substantial amount of debt that you can’t pay back, it can be difficult to deal with the potential of filing for bankruptcy. Not only do you have to confront the negative consequences, you might also be worried about how to file. The first step to figuring out your situation is to figure out if you need to file for bankruptcy and what kind of bankruptcy is best for you.
What is Bankruptcy?
When a court trustee and a judge examine the liabilities and assets of people and businesses, and they determine that these entities cannot pay their bills, a conclusion is made to discharge the debts; this is what is described as a bankruptcy.
Laws of bankruptcy were written to give individuals with collapsed finances a chance to start afresh. If it was bad luck or a bad decision that caused the situation, lawmakers decide that the businesses and individuals need another chance to start again.
Who Declares Bankruptcy?
Businesses or individuals who file for bankruptcy have accumulated more debts than the income they have available, with little to no chance of paying those debts off. This has been the case for many people. Approximately $113 billion was owed by bankruptcy filers in 2015, and their assets were about $77 billion; most of the assets were real estate holdings whose intrinsic value is debatable.
Types of Bankruptcy
There are different kinds of bankruptcy for individuals, businesses, and other entities. There are several different types of bankruptcy, but many of them are incredibly specific and don’t apply to most people. The most common types of bankruptcy are Chapter 7 and 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is where the court judgment releases you the responsibility of repaying the debt. You are given a chance to keep primary assets that are considered as “exempt property”, but the ones that will be sold to cover part of the debt are referred to as “non-exempt property.” Different states have different definitions of exempt properties.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy involves the payment of part of the debt, and then the other part of the debt is forgiven. It is a good option for those who do not qualify for Chapter 7 because they have high incomes, or for those who are not ready to give up their possessions. If your debts are below a particular cutoff, then people can file for Chapter 13 bankruptcy. Always remember that the cutoff is usually re-evaluated periodically through a means test.
Which One Should I Choose?
Even though most people prefer filing for Chapter 7 over Chapter 13, not everyone qualifies to get it. Even if you are eligible, at times, it might not be the right option for you. Here are a few questions to consider when you are figuring out which kind of bankruptcy would be best for you.
- Do you own a lot of property?
- Are you current on your car payments or house payments?
- Do you have a disposable income each month after covering your monthly expenses?
- Do you have the required low income to file for chapter 7 bankruptcy?
- Are you willing to liquidate your assets for debt payments?
- Do you have dischargeable debts in Chapter 7 bankruptcy?
- Do you have enough money to qualify for chapter 7 bankruptcy?
It’s never an easy decision to file for bankruptcy, but considering all your options carefully will help you figure out what is best for you.