A bankruptcy sign

What Is Consumer Bankruptcy?

Life in the United States is tough for the general public. Not everyone has a six-figure salary and can afford to keep paying bills on time. Many people are troubled by debt resulting from credit cards, home loans, student loans, car loans, etc. Debt keeps mounting, and there comes a time when a person has no option but to give up. This is when filing for bankruptcy makes sense. Large debts incurred for business or personal reasons may necessitate filing for bankruptcy. On the other hand, consumer bankruptcy entails filing for bankruptcy due to personal reasons. A consumer is allowed to file under Chapter 7 bankruptcy or Chapter 13 bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most popular kind of consumer bankruptcy, and it applies to both business entities and individuals. To be eligible for chapter 7 bankruptcy, your disposable income needs to be low enough to bolster your case. Whether the income is low or not is determined via a means test. This test takes into account your expenses and income, and you won’t be eligible if the numbers don’t meet certain requirements. Under Chapter 7 Bankruptcy, your medical bills, credit card bills, and most of the other general unsecured debts will be wiped out, and you won’t be allowed to pay back money via a repayment plan. Some major features of Chapter 7 bankruptcy include:

  • Debtors discharge qualifying debts, giving a fresh start to the consumer
  • A trustee is appointed to administer the consumer’s case and review their bankruptcy papers as well as supporting documents
  • A trustee is allowed to sell the consumer’s non-exempt property and use the money to return money to creditors
  • An automatic stay prevents creditors from collecting debt from the consumer

Chapter 13 Bankruptcy

Chapter 7 bankruptcy involves liquidation, while Chapter 13 bankruptcy is about the reorganization. This type of bankruptcy is for consumers who have a decent income with enough money left over every month to pay back some of their debts with the help of a repayment plan. Some of the major features of Chapter 13 bankruptcy include:

  • Applies to more affluent consumers/debtors
  • Individuals who need some debt relief to stop litigation or lower their card payments may apply for Chapter 13 bankruptcy
  • Individuals are allowed to keep their property, including non-exempt assets. However, they have to pay an amount equal to the total value of the non-exempt property to the creditors
  • Individuals who fall behind on loan payment and want to catch up on the missed payments to keep their assets may apply for this type of bankruptcy

Final Thoughts

Applying for bankruptcy isn’t easy, and a lot goes into the process. Ideally, you should determine what kind of bankruptcy is most suitable for you and then apply for it. If you can’t figure out which bankruptcy applies to you, consult with a bankruptcy attorney.

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