If you’re facing a significant amount of debt, one way to address it may be through filing for bankruptcy. This is a legal tool that can reduce or eliminate much of your debt. As you begin researching your options, you may hear about something called “wage earner’s” bankruptcy. What does this refer to?
In general, this term is used when talking about Chapter 13 bankruptcy. If you use this type of filing, you create a repayment plan. Your debt is consolidated into this plan, and you then make monthly payments for the next 3 to 5 years. These payments will slowly reduce your debt until it has been fully addressed when the bankruptcy process concludes.
How is this different than Chapter 7?
Chapter 7 bankruptcy, on the other hand, is often known as liquidation bankruptcy. You essentially have to sell off non-exempt assets and use the money to pay the amount of debt that you can, while the rest of the debt will be forgiven.
To qualify for Chapter 7, there is a means test. You have to show that you don’t have a significant income and won’t be able to pay the debt back on your own.
That is why Chapter 13 is often referred to as “wage earner’s” bankruptcy. You may still be working full-time and earning a good income, but your debt obligations have just exceeded your income. You can still afford to make monthly payments, so the repayment plan works. If you don’t pass the means test and don’t qualify for Chapter 7, you could still qualify for Chapter 13.
Exploring your options
These are the main two types of bankruptcy. It’s important to look carefully into all of the options that you have and the legal steps you’ll need to take to utilize them.