If you are having trouble making debt payments on time, it may be worthwhile to file for bankruptcy. Generally speaking, you will file for either Chapter 7 or Chapter 13 bankruptcy depending on the details of your financial situation. Let’s take a closer look at each type of proceeding and how it can help you better manage your finances.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is known as a liquidation bankruptcy, and it allows individuals to sell assets in an effort to repay creditors. If the value of your assets is less than the what a creditor is owed, the remaining balance is forgiven. Assets such as equity in a home, clothing or a personal vehicle are generally exempt from being liquidated.
Retirement accounts may also be off-limits to creditors in a liquidation bankruptcy proceeding. To qualify for Chapter 7 bankruptcy, you must pass a means test. Passing the test means that you make less than the median income in your state. However, you may be barred from pursuing a Chapter 7 case if you have filed for this type of protection within the previous eight years.
Chapter 13 bankruptcy is typically referred as the wage earner’s plan. This is because you have to have a regular income that be used to make monthly payments to your creditors. A repayment plan lasts for either three or five years depending on your income, and it must be approved by the bankruptcy court as well as by your creditors. If you wish to retain a home or car, you must stay current on your mortgage or auto loans in addition to making your plan payments on time.
How Could Bankruptcy Impact My Structured Settlement?
If you have been injured, you may receive compensation in the form of a structured settlement. Under a structured settlement, you receive your award in installments each month as opposed to in a single lump sum. If you choose to file for bankruptcy after you settle your case, the money may become part of your bankruptcy estate (source: Structured Settlement: What Is It & How It Works – CashInYourAnnuity.com). This means that it could be used to pay creditors in a Chapter 7 case or included as income when determining a Chapter 13 plan payment.
Bankruptcy can have both positive and negative consequences for your credit and overall financial future. However, the relief that you may feel knowing that your debts are finally being taken care of may make the choice to file worth it.