No one wants to be in a situation where they have to file for bankruptcy. However, because of COVID-19, many find themselves unable to pay their debts. In 2020 alone, 544,463 Americans have filed for bankruptcy. If you find yourself under these circumstances, you should know that there are still options for you.
The United States law has six chapters for filing bankruptcy that can cater to your needs and preferences. Check out this guide if you need help to decide and distinguish chapter 7 versus chapter 13.
The Benefits and Risks of Chapter 7
Out of more than 500,000 Americans who filed for bankruptcy, 381,217 utilized chapter 7. If you ask any of them, one of their main reasons for filing for chapter 7 is probably for its debt discharge. With chapter 7, the law does not require you to pay your debts back anymore. It gives debtors a sense of peace and safety as collectors are restricted from pursuing you. However, not all of your debts are discharged.
Some things cannot be excused, including alimony, child support, and certain taxes. Chapter 7 still frees up some of the money you used to pay for your debts for a usable income for your daily needs.
Another reason chapter 7 is the most common choice is that the process is a lot faster than the other chapters. It only takes up to five months, making it the best option for those who want to get out of their situations fast.
It also allows you to have a fresh, debt-free start. However, part of the deal is that you would start with a blank slate. This may sound good, but it also means that you would lose your assets. This varies depending on your state, but you should be prepared to lose your property or equity in some assets.
Filing for bankruptcy will appear in your credit reports for ten years. You might find a more challenging time to loan, but it would be easier to build yourself back up.
How do I know Chapter 7 is for Me?
It would be best for your situation to file for chapter 7 if you have low income and unsecured debts. Filing for chapter 7 includes passing a “means test” where your capability to pay your debts is in check. Also, as said above, one of the consequences of this chapter is that you may lose your assets. However, the risks are minimized if you only have unsecured debts. In other words, there should be no collateral requirements for any of your debts.
The Benefits and Risks of Chapter 13
Filing for chapter 13 is best for people with assets to lose. This stops any foreclosures. It also helps keep your collectors from pursuing you for debt repayment. Chapter 13 works through a repayment plan that may last three to five years. This makes it ideal for filers with a stable income, but it is also a risk that you would have to shoulder for a while.
You would have to work harder on budgeting, as losing your chapter 13 status may result in a loss of assets. Finally, unlike chapter 7, this does not significantly impact your credit. It would still appear in your credit reports, but many creditors would be more amenable to it than the other chapters.
How do I know Chapter 13 is for me?
If your income is more than your state’s median income, then chapter 13 is probably the way to go. In this situation, you would not be able to file for chapter 7. This is ideal if you want to keep your assets and have a good, reliable source of income. However, it is essential to note that it is strongly recommended to hire an attorney to help you file for chapter 13. While you can file for it yourself, many legal and financial outcomes are best handled by a professional.
Work With a Reputable Lawyer
Whether you’re filing for bankruptcy under Chapter 7 or 13, it’s best to have reliable and trustworthy legal counsel helping you out. They may not erase your debts, but they can surely help lobby for the best repayment terms for you.