The main purpose of bankruptcy is to eliminate debt and give you a fresh start financially. However, there are debts that cannot be discharged by law. Certain tax debts, child support and alimony payments are the most common undischargeable debt. There are basically two ways to eliminate debt in bankruptcy. The first is by paying them off through liquidation of assets and the second is by repaying debt through a payment plan.
These two basic ways to discharge debt falls under two types of bankruptcy. If you are an individual seeking bankruptcy protection, you can either file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is called liquidation bankruptcy for it entails liquidating assets to pay off your debts. But this does not mean all your assets will be liquidated. The law exempts your primary home and vehicle so you do not have to worry about losing those. Chapter 7 bankruptcy is a good option for those who are unemployed or those with low income.
To qualify to file Chapter 7 bankruptcy, you need to pass a means test. The means test varies from state to state and is basically the average total income of a household according to size determined by your state. If your average monthly income over 6 months prior to filing for bankruptcy is lower than the state mean, then you are eligible to file a Chapter 7 bankruptcy petition.
The other option is to file for Chapter 13 bankruptcy. Under Chapter 13 bankruptcy, you get to keep all assets and do not liquidate any of them. Debt is consolidated and discharged through a court-ordered payment plan that may take anywhere from 3 to 5 years.
So there are pros and cons in both Chapter 7 and Chapter 13 bankruptcies and your choice would depend on your particular circumstances. Chapter 7 bankruptcy is a quicker process but entails liquidation of assets. Chapter 13 bankruptcy allows you to keep your assets (as long as you keep paying according to the payment plan) but takes a longer time. Both Chapters allow you an immediate automatic stay that prevents creditors from making collection efforts against you during bankruptcy. You should discuss which type of bankruptcy to file with a qualified bankruptcy attorney.
Filing bankruptcy will affect your credit score, but if you are drowning in debt, it would do no worse than your credit score without bankruptcy. Your bankruptcy attorney can advise you on how to raise your credit score in the shortest possible time after bankruptcy.