It’s all too easy to build up debt, which is great when raising your credit score. As such, credit card offers often come by the dozen and make quick work of large purchases. However, in an unfortunate accident, someone could become overwhelmed with medical debt. Or, for example, late fees can stack up if someone’s recently been unemployed.
When this happens, people often need to relieve their debt. One of the fastest ways is bankruptcy. Bankruptcy is a legal process that helps people start fresh by eliminating some or all of someone’s debt.
There are many kinds of bankruptcy, yet, Chapter 7 and Chapter 13 bankruptcy are often the most popular. While Chapter 7 and Chapter 13 are both forms of bankruptcy, each process works differently.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy? Here’s what you should know:
Chapter 7 bankruptcy is also called liquidation bankruptcy because debtors may have to sell some of their assets to eliminate their debt. Many people fear that this means they’ll lose everything – their home, car, collectibles, appliances and clothes – just to wipe away their debt, however, that’s far from true. Many assets are considered exempt, meaning the debtor can keep them after filing for bankruptcy.
What assets are exempt and nonexempt? In short, assets that, if liquidated, might put hardships on the debtor are exempt, such as a used car, first home and clothes. Assets that might be considered excessive, like a luxury car, vacation home or art collection, aren’t exempt from liquidation.
Debt refinance plan
Chapter 7 bankruptcy isn’t always optimal for some people. As such, instead of liquidating assets, people may consider refinancing their debt after filing for Chapter 13 bankruptcy.
That’s to say that Chapter 13 bankruptcy allows people to pay off their debt in manageable chunks. People who have disposable income, yet not enough to pay off all of their debt, often file for Chapter 13 bankruptcy. The main benefit is that debtors can keep their assets and pay off their debt in a few years.
If you’re planning to file for bankruptcy, you should be sure you understand your legal options.