When you file a personal bankruptcy, you typically choose between Chapter 7 or Chapter 13. Each option has benefits and drawbacks and only you can decide if bankruptcy is the best option. Bankruptcy isn't something to be entered into lightly, and the best option for you depends on your situation as well as what you hope to accomplish by filing.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is a relatively short process in which your bankruptcy trustee sells, or liquidates, your nonexempt property in order to pay your creditors. Property that could be nonexempt may include a house or a car if they don't qualify for an exemption under your state's guidelines. Because this process typically only lasts between four and six months, it's often an option for someone who wants to clear their debts and start over.
It's possible to start over without most of your debts once you successfully complete your Chapter 7 bankruptcy and receive a discharge. With a discharge, any debt remaining from before you filed, which wasn't paid back from the sale of your assets, typically gets wiped out. However, there are some forms of debt that a Chapter 7 bankruptcy can't erase.
These debts include:
- Child support
- Student loans
- Taxes owed
- Debts not listed in your bankruptcy papers
- Debts incurred as punishment, such as traffic tickets, restitution, or amounts owed for personal injury or death due to a DUI
In order to file a Chapter 7, you have to meet certain qualifications, which vary by state, and pass a "means test." A means test is designed to limit Chapter 7 bankruptcy filings to people who aren't able to repay their debts. It looks at your income for the six months prior to filing for bankruptcy and compares it to the median income for your state. If you make less than the median income for the same-sized household in your state, you pass the test and can continue with your filing.
If you're a high-income bankruptcy filer and don't qualify for a Chapter 7, you're left with the option of a Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is a long-term repayment process that lasts either three or five years. During this process, you work with your bankruptcy trustee to repay your creditors for all or most of your debt. In a Chapter 13, you're typically able to keep your property, such as a house or a car, even if you're behind on payments. Chapter 13 gives you the protection of the bankruptcy court with an automatic stay, so collection efforts stop and you can focus on repayment without the fear of losing your means of transportation or your home. However, there are still requirements, and Chapter 13 isn't for everyone.
With this type of bankruptcy, your debts, both secured and unsecured, can't exceed set limits. If you have too much debt, you may not be able to file Chapter 13. Another eligibility requirement is having a steady income. You have to prove to the court that you can continue to pay your bills and meet your repayment plan obligations. Once you file, you're also required to participate in mandatory credit counseling.
Vehicle Needs and Bankruptcy
As to which bankruptcy is better – Chapter 7 or Chapter 13 – you have to make that call. But since you might need another vehicle during the course of a Chapter 13, it's good to know that there are options available for people who need a car during bankruptcy, even those with poor credit. Here at The Car Connection, we want to help you find the option that's right for you.
We work with a large network of special finance dealers all across America that have the lending resources to help people who need vehicles during or after bankruptcy. The process is simple, just fill out our free, no-obligation auto loan request form, and we'll get to work matching you with a local dealership today!