You are living paycheck to paycheck, and then you learn your job is being downsized. Or your two months' savings has already evaporated and you maxed out your credit card to pay for your grandmother's cancer treatment. You have looked at your budget, and try as you might you see no path to make it through the next few months; creditors are making your life miserable.
What is Bankruptcy?
Bankruptcy is a rather straightforward and legal way to get some kind of relief from your creditors. Unless you have a family farm that you are plowing under, chances are, if you need to file, you will file for bankruptcy under Chapter 7 or Chapter 13. These Chapter names refer to their respective parts of the 1978 law that made bankruptcy somewhat easier in the U.S. Both can be filed by individuals.
The Differences Between Chapter 7 and Chapter 13
The main difference is that in chapter 7 you are agreeing to liquidate most of your assets, and in exchange, also say goodbye to most of the creditors who have been calling you 7 days a week for several months. Your debts are, for the most part, wiped out. In Chapter 13, you are instead reorganizing your debt. You work out a plan, in this case, to pay off the debts in 3-5 years, either partially or completely.
Chapter 13 is often the preferable choice, if you are a homeowner and actually plan to keep your home, or of you have considerable assets, most of which you would prefer to keep. However to be eligible for Chapter 13, or for it even to make sense, you need to be able to show a steady income over the next several years. This income must be sufficient to potentially keep you afloat with daily living expenses, and still have some money left over to pay down much of the old debt.
Chapter 7 Bankruptcy and The Means Test
Chapter 7 is also not for everyone. The hardest hurdle to pass is the means test. It basically requires that your monthly income right now is low enough that after expenses, you would not have enough money to do a workable chapter 13 plan. Fewer than one in five people who consider filing for Chapter 7 have a problem meeting the means test, and veterans have a leg up on this hurdle. Another problem with Chapter 7, for the home owner, is that it does little to help with debts from falling behind on your mortgages, or your taxes. The best you can expect, in most cases from a Chapter 7 bankruptcy, is about a 3-5 month delay in any foreclosure efforts.