Making the decision to file bankruptcy is only the first step. You must then decide which variety of personal bankruptcy to file. The two most common varieties of personal bankruptcy are Chapter 7 and Chapter 13.
Keep in mind that declaring personal bankruptcy of any variety does not not absolve you of certain debts, like child support, student loans and alimony. According to Credit Karma, Chapter 13 bankruptcy is a liquidation bankruptcy while Chapter 13 bankruptcy is a reorganization bankruptcy.
What is a liquidation bankruptcy?
A Chapter 7 bankruptcy is a liquidation bankruptcy because it uses your current assets to pay off your debtors. Of the two bankruptcies, Chapter 7 is more common for individuals to file. In order to be eligible for Chapter 7 bankruptcy, you will have to pass a means test to prove that you cannot reasonably pay off your debt.
One of the major advantages of a Chapter 7 bankruptcy is that you will be able to remove your debts much faster. However, filing a Chapter 7 bankruptcy means that you may lose assets such as current cash holdings or your home.
What is a reorganization bankruptcy?
Individuals who file Chapter 13 bankruptcy generally have too much income to qualify for a Chapter 7 bankruptcy. A Chapter 13 bankruptcy involves sitting down and coming up with a payment plan to appease your creditors. You then must adhere to this payment plan over the course of three to five years.
Chapter 13 bankruptcies take longer than Chapter 7 bankruptcies, but come with the benefit of being able to hold on to your current assets. If you are unable to adhere to the payment plan, your Chapter 13 bankruptcy may convert to a Chapter 7.