There are two different types of bankruptcy that private individuals can take; Chapter 7 and Chapter 13. With the new laws, you actually have to qualify to take Chapter 7 bankruptcy. The laws were intended to require people who can afford to make payments toward their debt do so. The laws have succeeded in making the cost of bankruptcy much higher as there is more paperwork for the attorneys to do.
So how do you know if you qualify for bankruptcy?
The test is actually not difficult if you are low income but can be more complicated if you are above it. It is based on your income over the past 6 months. If your income is higher than the median income in your state, you may have to take Chapter 13 bankruptcy. You can take this test at Nolo.com which computes the IRS allowable expenses to determine if people over the median income can file for Chapter 7.
What is the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy?
The types of bankruptcy are generally and commonly known by the chapter of the bankruptcy code that relates to that specific type. The types most commonly used by individuals are:
Chapter 7 is what most people mean when they talk about bankruptcy. It is a liquidation or termination of all unsecured debts and is the preferred method of declaring bankruptcy. If you have secured loans (mortgages, car loans) you will have to continue paying them in order to keep them. Chapter 7 bankruptcy remains on your credit report for 10 years.
Chapter 13 is basically a repayment plan. It is a reorganization of debts and is meant for people who have a stable income. It sets up a payment plan over 3 to 5 years where you pay off a portion of your debt. It allows people who want to keep their secured property to do so if they can make the payments. Chapter 13 bankruptcy remains on your credit report for 7 years.
As I have said before, bankruptcy should be a last resort but it can help you save your house or your car. It can relieve some of the stress if you lose your job. If you are considering bankruptcy, consult a qualified attorney in your state.
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