For many people, the word “bankruptcy” often carries with it a negative connotation. For some it may even elicit ideas of failure and disgrace. However, what many people don’t understand is that life happens and it is often much more complex than we would like to believe. There are struggles and strife that thousands of people deal with every day. For example, some people incur excessive medical bills to an attempt save a loved one’s life. For others, they will incur deb, with good intentions, only to find that after a few mistakes, and in increased interest rates, their life has spun out of control. For these reasons, and more, our government introduced bankruptcy to help people recover from these financially difficult times and pursue the American dream. A way for Americans to have a fresh start free from the shackles of debt.
Through bankruptcy, a person can either eliminate or repay certain debts over time in a way that is safe from harassing creditors and excessive interest rates. There are two main types of bankruptcy a person can declare: a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a sort of “clean slate” for the debtor. The courts will completely eliminate most types of his or her debts. This type of bankruptcy will usually take place between 4-5 months. In order to qualify for this type of bankruptcy, there are certain income requirements that must be met first. Usually, the level of income required to file for a chapter 7 bankruptcy is low: it helps if your income is below the median income for a family your size. Also, about 5% of the time, there is a liquidation where the court will require that the extraneous property that you may have (non-exempt property) is liquidated by a trustee and those funds generated go to pay as much as possible to your creditors.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy on the other hand is a sort of way to restructure debts where a person can slowly repay the debts at a reasonable interest rate. This type of bankruptcy will usually take place between 3-5 years. It is important to note that the income requirements are not as strict and it is for a chapter 7 bankruptcy, because often the debtor will qualify by paying back over time the unsecured debt at a lower interest rate. Also, the debtor has many “nonexempt assets” then he or she must pay off more debt.