Many people are reluctant to file for bankruptcy because they view it as a sign of failure or personal weakness. However, thousands and thousands of people face financial struggles due to no fault of their own.

Economic distress can result from many causes, including massive medical debt, the loss of employment, divorce and other unforeseen events that make it impossible to meet financial obligations.

Chapter 7 vs. Chapter 13

Federal law created five different types of bankruptcy, four of them involving individuals. The two most common individual filings are:

  • Chapter 7: The most often-used personal bankruptcy filing, which allows for debts to be forgiven in exchange for the filer relinquishing nonexempt assets. Exempt property is typically defined as a possession a person needs to achieve a fresh start after bankruptcy, such as a house and car.
  • Chapter 13: The second-most common type for individuals, which is less about eliminating debt but focusing on reorganizing the filer’s finances. Instead of turning assets over to a trustee, the filer makes payments for three to five years to pay off creditors.

Advantages of Chapter 13 bankruptcy

Chapter 13, which is also referred to as the “wage-earner” plan, provides bankruptcy protection from creditors even if the filer makes too much money to qualify for Chapter 7. It allows a person to take more time to pay off amounts that are owed on houses, cars and other secured loans. The primary feature is a 36- to 60-month payment plan, which is designed to:

  • Create affordable and manageable payments for unsecured debts, such as credit cards and medical bills
  • Allow more time to pay off past-due balances for debts, such as a mortgage, car loan, income tax, child support and alimony
  • Allows the filer to avoid selling or relinquishing nonexempt property

Bankruptcy can lead to financial freedom

Those filing for Chapter 13 must make monthly payments to a trustee who distributes funds to creditors. However, unsecured creditors typically receive a small percentage of what is owed. While a bankruptcy filing may remain on a person’s credit report 10 years after the debt is discharged, credit is often available soon after. An experienced bankruptcy attorney can help find the best plan to get your life back on track.