The word “bankruptcy” can conjure all kinds of dark and foreboding thoughts — loss of assets, destruction of credit, loss of credibility and more. But is it really as gloomy as the stigma might have you believe? Not necessarily.
Over a five-year span, ending December 2019, Americans filed nearly 4 million nonbusiness bankruptcies. That means, on average, well over 750,000 people filed per year. So, you are far from alone in facing this challenge!
In personal bankruptcy, filers generally use 2 types: Chapter 7 and Chapter 13. While they are very different in some ways, they also share some characteristics. For example, filing either type will automatically prohibit certain debt collection efforts. With some exceptions, this prohibition — called a “stay” — bars creditors from calling filers or garnishing wages, among other behaviors.
Chapter 7 bankruptcy
For people below a certain income level, Chapter 7 may allow the discharge of many — though not all — types of debt without further liability. However, erasing those debts involves first liquidating the filer’s nonexempt assets as payment to creditors. As such, Chapter 7 may result in the filer starting from scratch in accumulating assets. On the other hand, it may also enable the filer to resolve seemingly insurmountable debt.
Chapter 13 bankruptcy
In contrast, for those above a certain income level, Chapter 13 may allow a filer to preserve treasured assets. To achieve this, the filer will still have to make payments toward debts — through the court — for up to five years. Chapter 13 reorganizes and consolidates debts, and the filer proposes a payment plan. At the end of the plan’s term, the bankruptcy court may finally discharge certain — but again, not all — remaining debts.
Each type of personal bankruptcy has advantages and disadvantages. Several variables will factor into determining which type is best for you to file, such as your income and debt levels. Whichever you file, bankruptcy can help you get back on track toward a more secure and stable future.