There are now extreme pressures on consumers facing debt. When they need to make a financial fresh start, bankruptcy may be the most practical way to discharge or restructure their debt. But this is an extreme step which requires understanding the most common forms of bankruptcy.
Chapters 7 has the greatest number of filings and is identified as a straight bankruptcy. Debtors can eliminate debt unsecured by collateral, such as medical loans and credit cards, by surrendering their assets.
Upon filing, creditors may not garnish wages, call or demand payment or file a lawsuit against the debtor. A creditor meeting usually occurs after 40 days where the debtor must answer questions under oath. No payment plan is required.
Chapter 13 is the second most used bankruptcy. It buys time to eliminate debt through a repayment plan to pay back some or all the debt over three to five years. The debtor makes monthly payments to a court trustee who distributes that money to creditors. The remaining debts are discharged at the end of the plan.
Filing this bankruptcy enters an automatic stay which stops most collection actions. Chapter 13 also protects home foreclosures and co-debtors, but debtors must continue to pay their mortgage to prevent foreclosure.
Chapter 7 is usually more affordable than Chapter 13 and is a comparatively quick way to come out of debt. It is recommended if the debtor owns little or no property, has an income level that meets the means test, has mostly unsecured debt, and does not want to comply with a three to five-year repayment plan.
Chapter 13 is a recommended option if a debtor can pay some of their debts. It provides a manageable and affordable payment of unsecured debt and helps deal with late payment on a home, vehicle or other debts.
Chapter 13 may be better than Chapter 7 if there are unpaid income taxes, domestic support obligations or student loans or other debts that cannot be discharged. It may save homes from foreclosure or if the debtor has a high income that disqualifies them from Chapter 7 but allows them to pay off debt.
Filing bankruptcy should be carefully considered because it has serious consequences such as lowering credit scores and impacting credit. An attorney can help provide reasonable options and meet filing requirements.