There are a few different types of bankruptcy to choose from. For most consumers, the main debate is just going to be between Chapter 7 and Chapter 13. If someone does not pass the means test for Chapter 7, they may be eligible for Chapter 13 instead, so it is important to know how these work.
The biggest difference overall is that Chapter 13 revolves around a long-term repayment plan, which pays off either a portion or 100% of the debt. On the other hand, Chapter 7 focuses on liquidating assets, and the money from this liquidation is then used to pay down a portion of the debt. Remaining debts beyond this are then forgiven.
What factors are considered?
The biggest determining factor when deciding which one to use is the debtor’s income. If someone has a very low income or none at all, then Chapter 13 would not make sense because they cannot afford the monthly payments. For them, the best option may be to liquidate their non-exempt assets so that they can have their debt forgiven.
If someone has a significant income, however, then their problem may be that they simply cannot afford to pay all of this debt at one time. In this sense, the repayment plan actually works better for them. They know that they have a consistent income and they can make small monthly payments for the next three to five years. Spreading the debt out makes it affordable.
There are certainly pros and cons to both of these types of bankruptcy, and it is important for people to consider them carefully when deciding how to approach their financial future. If you are in this position, one of the best steps to take is simply to see which type of bankruptcy you qualify for. You can then begin looking into your legal options to utilize it effectively.