If you are feeling the pressure of mounting debt, actively looking for solutions sooner rather than later can help you decide on the best options. Filing for bankruptcy can be an effective way to handle financial difficulty.

Those filing for personal bankruptcy may resort to a Chapter 13 or a Chapter 7 filing. Each has its own requirements as well as its own advantages and drawbacks. A knowledgeable attorney can help you determine which would work best in your situation.

How it works

Chapter 7 is a liquidation bankruptcy. This means the court assigns a trustee to oversee the process. The trustee sells your non-exempt assets and uses the proceeds to pay off creditors. In many cases, this means distributing proportional payments and discharging the part of the debt proceeds cannot cover.

Keeping property

If you want to keep a secured asset you still owe money on, such as a financed car, you will need to sign a Reaffirmation Agreement and keep making payments. The equity you have in the asset must also be covered by the exemptions.

Advantages of a Chapter 7 filing

Filing for Chapter 7 should halt collection proceedings against you and protect you from calls and other attempts to collect. This type of bankruptcy process tends to go quickly; you can be finished in as little as three months from filing.

When a Chapter 7 may not help

However, Chapter 7 does have some important limitations. You will not be able to hold on to property that exceeds California exemptions; this includes homes and vehicles. If keeping certain property is a priority for you, you may consider filing a Chapter 13 bankruptcy instead.

In addition, some debts cannot be discharged through either type of bankruptcy. If you file for Chapter 7, you will have to continue repaying them. Generally, these debts include family support obligations, financial penalties for breaking the law and judgments against you for injuries caused by drunk driving.

You must also continue to repay most types of tax debts and student loans; speak with your attorney about solutions that may be available if these obligations present a serious hardship. Finally, you will remain on the hook for debts you omitted from your bankruptcy filing, unless the creditor actually finds out about your bankruptcy.