If you need help obtaining debt relief, it may be a good idea to file for bankruptcy. Typically, individuals will file for either Chapter 7 or Chapter 13 protection. Understanding the difference between these debt relief options may make it easier to make a decision that helps you build a stronger financial future.
What to know about Chapter 7 bankruptcy
A liquidation bankruptcy allows you to eliminate a variety of unsecured debts such as medical bills, personal loans or credit card balances. The trustee has the authority to liquidate nonexempt assets in an effort to raise funds that will be given to your creditors. However, state bankruptcy laws may allow you to retain some of the equity in a car, home or other personal property.
Furthermore, the trustee may decline to sell items that you might need to maintain a basic standard of living. It may be necessary to pass a means test to qualify for Chapter 7 protection. You can expect to receive a discharge roughly six months after a judge receives your bankruptcy petition.
What to know about Chapter 13 bankruptcy
A reorganization bankruptcy allows you to obtain debt relief without the need to sell property. However, you will need to remain current on a mortgage, car loan or other debt obligation to retain ownership of the underlying collateral. In addition, you’ll need to adhere to the terms of your proposed payment plan.
Payment plans can last for up to five years depending on how much disposable income you have. At the end of the repayment plan, any remaining unsecured balances will be discharged. In some cases, it may be possible to convert the negative equity in a secured asset into unsecured debt.