Most people picture bankruptcy as one thing. It is two, and the one you are allowed to use is decided by your income, not your preference.
General information, not professional financial, tax, legal, or insurance advice. The Dreamy Leads Research is an editorial and data team, not a licensed advisor.
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Chapters
- 0:05 What it actually does
- 0:23 Chapter 7 is liquidation
- 0:38 Chapter 13 buys you time
- 0:54 Your income picks the chapter
- 1:10 The debts that survive
- 1:24 Ten years on your credit
- 1:40 The step nobody expects
- 1:54 Price the alternatives first
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Full transcript
What it actually does
Bankruptcy is a legal process in federal court, and it does two things in order. The moment you file, an automatic stay stops the calls, the lawsuits, the garnishment. Then the court either discharges the debt or folds it into a plan it supervises.
Chapter 7 is liquidation
The U.S. Courts call Chapter 7 liquidation. Property you cannot exempt is sold, and the proceeds go to your creditors. It is the fast route to a discharge, and the price is that filing may mean losing property.
Chapter 13 buys you time
Chapter 13 is an adjustment of debts for someone with regular income. You keep your property and you pay over three to five years. The law is firm on the ceiling: no plan may run longer than five years.
Your income picks the chapter
Compare your current monthly income to your state median. At or below it, Chapter 7 is open. Above it, the code applies a means test to decide whether granting you Chapter 7 would be an abuse of the chapter.
The debts that survive
This is the part that surprises people. Section 523 excepts nineteen categories of debt from discharge. Child support and alimony. Most government backed student loans. Certain taxes. Government fines. Anything you forgot to list.
Ten years on your credit
Per the Consumer Financial Protection Bureau, most negative information can be reported for seven years, but bankruptcies can stay on your report for up to ten. That number is why this is a last resort and not a strategy.
The step nobody expects
Every individual filer has to complete credit counselling with an approved agency within the hundred and eighty days before filing. Take it early rather than last, and a legal formality turns into actual advice.
Price the alternatives first
Strip out the debt a discharge cannot touch and see what is really left. If the shortfall is temporary and the debt is unsecured, consolidation or settlement can beat a court filing. The full breakdown is on Dreamy Leads dot com.
Frequently Asked Questions
What is the difference between Chapter 7 and Chapter 13?
The U.S. Courts describe Chapter 7 as liquidation — nonexempt property is sold for creditors. Chapter 13 lets you keep property and repay over three to five years, and no plan may exceed five years.
How long does bankruptcy stay on your credit report?
Per the CFPB, bankruptcies can stay on a credit report for up to ten years, while most other negative information is reportable for seven.
Sources
- Dreamy Leads Research Financial Data Explorer
- United States Courts
- U.S. Department of Justice, U.S. Trustee Program
- Consumer Financial Protection Bureau
