There are many common misconceptions about what bankruptcy can do for someone. When bankruptcy is declared, a person is given the opportunity to repay debts. During that time, they will be protected by the federal bankruptcy court. The two most common forms of bankruptcy are liquidation and reorganization.
Chapter 7: Liquidation Bankruptcy
Not everyone can file for Chapter 7 bankruptcy. To do so, your situation must pass what is known as the “means test”. This test is a formula used to determine if your income is low enough. It combines household incomes and then subtracts expenses while factoring in the number of people in that house. Once qualified, Chapter 7 bankruptcy can erase most of your unsecured debts. Some of your property may be sold if it isn’t exempt, which most things are. To pay back secured debts, you are given the option of having items repossessed. But if the creditor agrees, you may be allowed to continue making your payments under the initial contract. Sometimes a one-time payment, replacing the current cost of an item, may be offered.
Chapter 13: Wage Earner Bankruptcy
Filing for wage earner bankruptcy will allow someone to repay debts through a payment plan over a period of three to five years. To qualify for Chapter 13 bankruptcy, a person must have a consistent income, and their debts need to be below a certain amount. During the repayment years, creditors legally cannot attempt to get payments from the bankrupt person. By declaring wage earner bankruptcy, a family may be able to save their home from foreclosure.