Individuals struggling with financial hardship have difficult choices ahead of them. Some people consistently try to rework their budgets as new expenses arise to handle their responsibilities to the best of their ability.
Many others might make the decision need to file for bankruptcy when it becomes obvious that they can’t resolve their financial challenges on their own. Personal bankruptcy provides the protection of an automatic stay. Creditors have to stop attempting to collect on a debt. They may even need to dismiss a pending lawsuit in response to a bankruptcy filing.
If the courts grant the filer the discharge of their unsecured debts, they can eliminate some of their financial obligations. Typically, individuals contemplating bankruptcy choose between two different types of bankruptcy.
Chapter 7 bankruptcy
For people with below-average income and high levels of debt, Chapter 7 bankruptcy may be the best option available. In successful Chapter 7 cases, eligible unsecured debts are discharged without a repayment requirement. In rare cases, a portion of the filer’s assets are subject to sale in an attempt to repay their creditors. Those filing in Alabama may only use the state exemptions. Federal exemptions are not available in Alabama.
Chapter 13 bankruptcy
Not everyone qualifies for Chapter 7 bankruptcy. Filers have to compare their adjusted household income to the median income for their household size in the state. Those who don’t pass the means test don’t qualify for a Chapter 7 filing.
They can rely on Chapter 13 bankruptcy instead. In a Chapter 13 filing, there is no maximum income. The filer negotiates a repayment plan. They make one monthly payment to the courts, and the trustee overseeing their case distributes the funds to their creditors in accordance with the plan. The payments last for between three and five years. If a filer completes the repayment process, they can discharge what remains on their eligible debts at that point.
Exploring the two most common forms of individual bankruptcy can help people select the best option given their circumstances. Those who file for bankruptcy when facing lawsuits or other collection activity can work to prevent their debt from having a long-term negative impact on their finances.