Businesses like corporations, partnerships and sole proprietorship are not the only ones who could get bankrupt when experiencing financial problems. This may happen also to private individuals whose debts are larger than their ability of repaying them. Their income might not be enough in paying all their obligations to their lenders and creditors so they seek a way of solving them.
This usually happens when the person not planned their expenses well or there are unforeseen things that affected their income. If this is happening to you then you could file for personal bankruptcy and have all or parts of your debts relieved. There are two main types of these that applies to consumers depending on their current situation which has different solution.
The first one is known as Chapter 7 bankruptcy where you can have all or parts of your debts discharged after repaying them using your liquid assets. These are those which can be converted into cash quickly such as savings and checking accounts. Some of them should be turned over to court and they will distribute these among your creditors for partial repayment.
These are also called as nonexempt assets because they could be used for repaying what you owe to these financial institutions. Those properties that cannot be used are called exempt and the state laws dictate which of them are considered as such. Examples of nonexempt ones are investments, jewelry, valuable artwork, expensive clothing, and property not considered as your primary home.
After these nonexempt items are distributed among your creditors then any remaining debt would be discharged. You have no liabilities to them any longer and these financial institutions you owed before could no longer collect them. Even third party collectors cannot attempt to collect from you these debts.
Qualifying for Chapter 7 needs you to pass an exam to prove your income is lesser than the median one in your state according to your family size. If you fail this test then you are not allowed to file under this type but instead you could file a Chapter 13. When you pass this, you must get credit counseling from a credit counseling agency that is approved.
Choosing to file under Chapter 13 requires you to repay all or parts of your debts with a repayment plan spanning three to five years. When making the personal filing, you must submit also to the court the repayment plan and start paying the court who would then pay your creditors. This must be done even if the plan has not been approved yet.
Few weeks after, a hearing will be held to approve the plan where creditors could object the payment amounts although the judge would still give the final decision. After its approval, payments to the court is continued until your obligation has been completed. Once you finished it, all remaining debt is also discharged, making you not liable for them.
Selecting this instead of Chapter 7 may be due to having secured debts like car or housing loan and you still like to continue paying. If you prefer keeping your assets then this is the better choice. This is also applicable when your income is above the median one.