Bankruptcy provides relief to individuals who are unable to repay their debts. The most common types of bankruptcy for Americans are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Here’s an overview of each.
Most bankruptcy filings in America are Chapter 7. In a Chapter 7 bankruptcy, you file paperwork asking the court to erase your unpaid debts. Most of your debts are erased, including credit card debt, medical bills, and most civil judgments. And in about 96% of cases, you get to keep all your property to restart your new life. Chapter 7 is designed to give you a fresh start.
But there are a couple drawbacks to Chapter 7. First, a few debts cannot be erased, including most student loans, child support, and mortgages. Second, if you own real estate, an expensive car, or something else that costs a lot of money, it might be taken by the court to repay your debts. Check here to learn more about protected property; the rules vary by state.
Chapter 13 bankruptcy generally allows you to keep expensive property like a house or a luxury car. But the trade-off is your debts aren’t erased like they are in Chapter 7. Instead, you must come up with a plan to repay some of your debts over a 3 to 5 year period.
As a result, Chapter 13 is usually less desirable than Chapter 7. But if your income is relatively high (you earn more than your state’s median household income), you may be required to file a Chapter 13 case instead of a Chapter 7. You should consult a lawyer about this.