Bankruptcy can provide financial options when debt becomes overwhelming. But the exact way that it does depends on the type of bankruptcy filing that is used. In fact, some individuals may qualify for a certain type of bankruptcy, such as Chapter 7, while they would not qualify for Chapter 13.
So which option is best for you? It is important to understand how they work to determine what you may qualify for and how it will help you in your specific situation.
Chapter 7
To begin with, Chapter 7 bankruptcy is the most commonly used type, and it is known as liquidation bankruptcy. There are many exemptions, so you do not have to sell everything that you own. But non-exempt assets do have to be sold. After this is done, the money is used to pay down a portion of the debt to various creditors, and then other debts are waived or eliminated.
Chapter 13
That said, there is a means test for Chapter 7, measuring income and assets. Someone who has a high income may not pass the means test, meaning that their only option would be to use Chapter 13.
With a Chapter 13 bankruptcy filing, there is usually not a requirement to liquidate assets. Instead, debts are consolidated and the court sets up a repayment plan. This is based on your income and debt level. You will likely have to make these payments every month for the next three to five years before the bankruptcy case concludes.
Either type of bankruptcy could be beneficial, so you just need to know what legal steps to take to utilize the one that would be best for you.