Personal bankruptcy refers to a bankruptcy case filed by an individual or married couple. If a married couple files bankruptcy together, it’s called a joint bankruptcy filing. But, there’s nothing that says you have to file with your spouse. Sometimes it makes sense not to. Chapter 7 and Chapter 13 are the most common types of personal bankruptcy. Even though a bankruptcy can stay on your credit report for up to 10 years, many filers see a noticeable increase in their credit score within 2 years of filing their case.
Chapter 7 Bankruptcy
From July 1, 2019 to June 30, 2020, more than 426,000 personal bankruptcy cases were filed under Chapter 7. That’s 65% of all non-business bankruptcy cases filed that year. Filing bankruptcy under Chapter 7 is often the most direct path to a fresh start for folks struggling with things like credit card debt, medical bills, or even a wage garnishment. To be eligible for Chapter 7, you have to show the bankruptcy court that your regular income isn’t enough to pay even a portion of your debts. This is called the means test.
How Chapter 7 Bankruptcy Works
Chapter 7 is called the “liquidation bankruptcy” because the bankruptcy law requires that certain property is sold to pay your unsecured creditors in exchange for getting a fresh start. The sale (or liquidation) is handled by a bankruptcy trustee. The trustee can only sell property that is not protected by an exemption (called non-exempt property). If all of your property is covered by an exemption, it can’t be sold by the trustee. In that case, your creditors get nothing and you get to keep all of your belongings.
In most personal Chapter 7 bankruptcy cases, all property is protected by an exemption under state law. If there are no non-exempt assets, most personal Chapter 7 bankruptcy cases last no more than 4 – 6 months. The bankruptcy discharge – the court order that eliminates your dischargeable debt – is usually granted about 3 – 4 months after the filing date. You can start rebuilding your credit as soon as that happens.
Chapter 13 Bankruptcy
This is the second most common type of bankruptcy filed by individuals. More than 232,000 Chapter 13 bankruptcy cases were filed from July 1, 2019 to June 30, 2020. Unlike Chapter 7 businesses (other than sole proprietors) are not allowed to file Chapter 13 bankruptcy. It’s called a reorganization because it involves a repayment plan that usually only pays a portion of the filer’s total debt. To file Chapter 13, your secured debt and your unsecured debt (including personal loans) can’t exceed a certain amount.
How Chapter 13 Bankruptcy Works
You create a budget based on your monthly income and your living expenses and tell the bankruptcy court how much you can afford to pay on your debts each month. The court and the bankruptcy trustee review your proposed repayment plan. Once it’s approved by the court, all you have to do is pay your disposable income to the trustee, and send in your tax return every year. Debt (other than student loans) that isn’t paid during this 3 – 5 year repayment plan is wiped out once done.
Some people file Chapter 13 bankruptcy because they make too much money to qualify for Chapter 7 bankruptcy. Others choose to file Chapter 13 because it gives them a certain benefit they’re not able to get in Chapter 7. You can, for example, avoid the sale of nonexempt assets by filing Chapter 13. It also gives you the chance to pay back certain nondischargeable debts, like past due alimony or child support and pay off car loans with a lower interest rate. And – you can do it all in manageable monthly payments based on your regular income.
Chapter 11 Bankruptcy
Even though individuals and married couples can file bankruptcy under Chapter 11, it’s not typically included part of a list of personal bankruptcy options. The court filing fee alone is more than $1,700 and bankruptcy attorney fees usually start somewhere around $15,000+. So, it’s an option, but it usually only makes sense if you’re a very high earner who can’t file a Chapter 13 because you have too much debt.