You may have heard that filing for personal bankruptcy has the potential to give you the fresh start you need to get a better grip on your finances and create a brighter future. You may, too, have heard that there are several types of personal bankruptcies that exist, among them the Chapter 7 bankruptcy and the Chapter 13.
What is the difference, and how do you know whether one form might better suit your needs than the other?
The Chapter 7 bankruptcy
To proceed with a Chapter 7 bankruptcy, which involves liquidating your assets to free up money to pay back your debts, Quicken Loans reports that you must first pass something called the means test. This type of bankruptcy helps those with limited incomes get themselves in a position to rebuild financially, and the means test involves comparing your household income against the median household income in Illinois.
The Chapter 13 bankruptcy
If you do not pass the means test, or if you have enough money to put toward at least some of your outstanding debts, you may decide to move forward with a Chapter 13 bankruptcy. Rather than sell off your possessions to pay your debts, this type of filing involves restructuring what you owe to make it more manageable.
Once you create a more manageable arrangement, you pay down those debts over a set period, which often falls somewhere between three and five years. If you uphold the terms of your agreement, some of your debts may undergo discharge in the aftermath.
To move forward with a Chapter 13 bankruptcy, you must show that you receive regular income. There are also limits to how much secured and unsecured debt you may have if you wish to move forward with a Chapter 13 filing.