Bankruptcy is a legal proceeding in which a debtor can either eliminate or reduce their debts under the protection of the Bankruptcy Court. Debtors with serious financial difficulties can find relief through a bankruptcy proceeding.
There are many different kinds of bankruptcy; however, the most common forms are Chapter 7 and Chapter 13 proceedings. A Chapter 7 proceeding is known as a liquidation, while a Chapter 13 proceeding is a reorganization of debts.
A Chapter 7 bankruptcy requires individuals or companies to liquidate all their assets, pay their debts, and receive a complete discharge of any remaining debts.
A Chapter 13 bankruptcy is a way of reorganizing and reducing an individual’s outstanding debts. The bankruptcy court sets up a payment plan in which the individual repays a set amount over a period of years. Once the individual completes those payments, any remaining debts are discharged.
When to Use a Chapter 7 Bankruptcy
- The individual’s debts are primarily unsecured debts, like credit cards and medical bills.
- An individual has low or no current income.
When to Use a Chapter 13 Bankruptcy
- The individual has substantial debts but can make payments under a payment plan because they have a steady job with a decent salary.
- The individual has secured debts, such as a home mortgage.
- The individual has debts that cannot be discharged under a Chapter 7 bankruptcy, such as student loans.