The decision to file for bankruptcy is rarely a flippant one and often is accompanied by a lot of insecurity and doubt. What will this mean for your financial future? How will this affect your credit? Which chapter of bankruptcy is even appropriate for your situation? These and many other questions may be on your short list to discuss with a legal professional.
If you’re filing personal bankruptcy, you’re likely deciding between chapter 7 bankruptcy and chapter 13. Let’s take a look at the similarities and differences between these two types of bankruptcy and help you sort out which is the better option for you.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is also known as liquidation bankruptcy. This means that your debts and responsibilities to creditors will be lumped into a single sum and liquidated, as close to entirely as possible. This type of bankruptcy is an option for both individuals and businesses.
Many people find chapter 7 bankruptcy to be the more appealing at first glance because they know that most of the debt that is wiped out during this process won’t have to be repaid. In addition, most creditors will be barred from continuing to contact you in an effort to collect repayment of debts, as ordered by the automatic stay placed on debtors in chapter 7.
This all sounds pretty great, but there are more things to consider before choosing chapter 7 than simply what you have to gain. You must also think about what you have to lose. In the case of chapter 7 bankruptcy, any property or assets you have that are not secured by a bankruptcy exemption are subject to being sold by your bankruptcy trustee to offset costs associated with your overall debt. The only way to keep from losing major property and assets in this process is for them to either be exempt or not to have anything worth selling in the first place.
Still, chapter 7 bankruptcy carries a lot of positive weight for those who feel they are drowning in debt they’ll never be able to repay. Once a filer takes the means test and receives a result that indicates an inability to repay creditors, chapter 7 filing can begin and legal and financial counseling can be scheduled to assist debtors through the process.
What is Chapter 13 Bankruptcy?
Another name for chapter 13 bankruptcy is a reorganization bankruptcy. This means that instead of your overall debt being virtually wiped out – as it is in chapter 7 bankruptcy – you will work with your legal team to reorganize that debt and create a repayment plan that is manageable with your current income and assets. This option is available only to individuals, although this includes sole proprietors of small businesses.
For some people, chapter 13 automatically sounds like the best choice because property is almost always kept by the debtor involved. However, that debtor is responsible for paying creditors the full, face value of those assets toward their debt, meaning that those who do not have a way to pay this sum should reconsider chapter 13 as an option.
Other reasons to consider chapter 13 over chapter 7 bankruptcy include:
- Being in debt for a house or vehicle and having fallen behind on payments but wishing to keep the property.
- Being in arrears of child support, alimony, or other non-dischargeable debts that the debtor intends to pay off within the next several years.
- Wishing to stop wage garnishment, but not qualifying for a chapter 7 bankruptcy
- Looking to reduce credit card payments without filing for chapter 7
- Otherwise looking for debt relief but unable to or uninterested in filing chapter 7
While neither form of bankruptcy is an ideal situation, some people who don’t need or want to go through with a chapter 7 find that the chapter 13 offers great benefits and can help them substantially reduce debt and improve their financial situation.
How Do I Determine Which Bankruptcy Chapter is Right for Me?
Typically, the type of filer you are and the amount of income you have to reasonably put toward your debt will be the primary determining factors in whether you should choose chapter 7 bankruptcy or chapter 13. However, there are some other differences that can be determining factors as well. Some of these are:
- How much total debt you have. In order to qualify for chapter 13 bankruptcy, you will need to have less than $394,725 of unsecured or $1,184,200 of secured debt.
- How long your settlement takes. Discharge from chapter 7 bankruptcy typically takes anywhere from three to four months, while chapter 13 may take three to five years.
- The fate of property. While chapter 13 filers will not lose property, they are required to continue to pay any unsecured creditors amounts equal to the value of those assets. In chapter 7, assets may be seized and sold as part of the liquidation of debt.
The fate of liens and the reduction of principal loan balances on secured and unsecured debt also vary between the two types of bankruptcy chapters. For more information about this – and if either of these or any other factors apply to your choice – consult your legal professional.
How to Find Help
So, you know you need help preparing and filing for bankruptcy, but you’re still not sure where to start. That’s okay! Today’s lawyers are experienced with helping clients just like you navigate situations that are often far more confusing than they should be.
To find help in your area, look for legal assistance websites or applications that guide you to local law practices. This can help you make the connection with a specialized bankruptcy lawyer who understands your unique situation and is ready to help from the moment they pick up the phone.
Regardless of which chapter of bankruptcy you choose to file for, you don’t have to go it alone. Talk to your lawyer, take your time in filing, and remember – this is not the end of the road, but a new beginning to a better financial future!