Chapter 7 and Chapter 13 are the two most common categories of bankruptcy petitions filed by individuals.
Type 7 permits you to retain the majority of your assets. This is the scenario that comes to mind when most people hear the word bankruptcy. Under Chapter 7, you must report to the court all of our assets, income, debts, and expenses. Based on your income and expenses, the court first determines whether you are eligible to file for Chapter 7 bankruptcy. If you pass a type of means test, you will be eligible to file for Chapter 7 bankruptcy.
In some instances, after a Chapter 7 bankruptcy petition is filed, the courts may determine that the debtor earns too much money or has too many assets to qualify. In such a scenario, you may be required to convert your Chapter 7 filing to a Chapter 13 filing.
If you are granted a Chapter 7 bankruptcy, the court will liquidate a portion of your assets and distribute the proceeds among your creditors. The majority of your remaining debts will be forgiven. In most circumstances, you will be permitted to keep your primary residence, your car, and a substantial portion of your other essential belongings. However, luxury items and investment items are typically among the liquidated assets used to pay creditors. Unless there are exceptional circumstances, the entire process typically takes less than six months.
In Chapter 13 bankruptcy, your debts will not be discharged. They are rather reorganized. The forms used to file a type 13 return are identical to those used to file a type 7 return. With this plan, you will be required to propose a three- to five-year repayment strategy for your outstanding debts. If the proposal appears plausible, it will likely be accepted. This form of bankruptcy filing allows you to keep all of your assets and allows you to arrange your debts in a manner that allows you to pay them off without much difficulty. Obviously, the disadvantage is that you must still pay off your debts.
In the past, declaring bankruptcy was so stigmatized that individuals avoided it at all costs. In recent years, however, the number of bankruptcy filings has increased so significantly that it no longer conveys the stigma it once did.
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