You’ve probably heard different bankruptcy terms, but if you’re like most people, you’ve probably never considered there could be various types of bankruptcy.
However, if you’re feeling overwhelmed by debt and monthly payments, then bankruptcy may seem like a very good idea. Knowing the difference between Chapter 7 and Chapter 13 bankruptcies can help you decide which may be your best option.
The means test
Chapter 7 is also referred to as a “liquidation bankruptcy.” Your assets are sold off to settle debts, with the exception of certain exempt items, such as:
- Your home, depending on the amount of equity, marital status, age and if there is a minor child living there
- Retirement accounts
- Personal items such as pictures, clothes and bible
- A $10,000 wildcard exemption, which could be used on a vehicle
After everything is sold, the proceeds go towards paying your creditors. Usually, it only takes a few months to discharge the debt.
In order to be eligible for Chapter 7, you have to pass a means test that compares your income to the median income in Tennessee, which is currently $106,705 for a family of four. If your income falls below the threshold, you’re eligible. But, if it’s not, then you will need to consider Chapter 13 bankruptcy.
Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” works exactly as described. This type of bankruptcy is more suitable for someone who has a steady income and debt under $2,750,000.
Under a Chapter 13 bankruptcy, you propose a repayment plan over a three to five-year period. Your regular payments go to a trustee who distributes the money among your creditors. An advantage to a reorganization bankruptcy is that you are able to keep your home and vehicle, as long as you remain current on your payment plan. It gives you a chance to get caught up and avoid repossession or foreclosure.
If you are considering bankruptcy, you need to sit down with someone who can review your financial circumstances and help you determine your best option.