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Should I File Chapter 7 or 13 Bankruptcy?

Filing for bankruptcy can be a powerful tool for debt consolidation and relief. It can help you get out from under the financial burden weighing you down. If you’re considering filing for bankruptcy, you may be wondering whether you should file Chapter 7 bankruptcy or file Chapter 13 bankruptcy. The right choice depends on your current income, assets, debts, and your future financial goals.

What are the Major Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy?

Chapter 7 bankruptcy can be a relatively quick way to wipe out general, unsecured debt like medical bills and credit cards, and it requires no repayment. It is designed for people with little to no disposable income available to pay back a debt. Although it wipes out most debts, it doesn’t clear particular types of debt such as taxes, student loans, or unpaid child support and alimony. When you file Chapter 7 bankruptcy, your nonexempt property is sold to pay back your creditors. The “means test” will help determine if you’re eligible to file Chapter 7 bankruptcy. If you make more than the median income of your state and have some disposable income to pay off a debt you may be forced to file Chapter 13 instead.

In Chapter 13 bankruptcy, instead of debt being completely wiped out, it is restructured with a manageable three- to five-year repayment plan. It is generally used by people with a regular income who are behind on payments on nonexempt assets they would like to keep. It may help people who are behind on home or car loans to keep their assets while paying them off over time.

Who Should File Chapter 7 Bankruptcy?

Once you’ve determined your eligibility to file Chapter 7 bankruptcy using the “means test” mentioned above, some of the advantages of Chapter 7 bankruptcy include:

• It is fairly quick. Chapter 7 bankruptcy cases generally take three to six months to complete.
• There is no repayment plan. Unlike Chapter 13 bankruptcy where debt is paid back over time, in Chapter 7 bankruptcy most debt is wiped out. General unsecured loans are cleared including credit cards, medical bills, personal loans from family and friends, and utility bills. Debts that are not wiped out are taxes, student loans, and domestic support.
• Property can be protected. Chapter 7 bankruptcy allows you to keep most necessities, however, luxury goods are not protected.

Who Should File Chapter 13 Bankruptcy?

If you make too much money to qualify to file Chapter 7 bankruptcy, Chapter 13 may be your only choice. However, there are circumstances you may choose Chapter 13 because it’s more advantageous to you. If you are in one of these situations, Chapter 13 may be the better fit.

• You are behind on an auto or home loan. Chapter 13 allows you to make up missed payments over time without losing your car or house. This isn’t allowed in Chapter 7 bankruptcy.
• You have debt that cannot be wiped out in Chapter 7 bankruptcy such as taxes, student loans or unpaid child support. You can pay these debts off over a three or five year period in Chapter 13 bankruptcy.
• You need more time to pay overwhelming debt. When you file Chapter 13 bankruptcy an automatic stay is put in place – meaning collection efforts against you are halted (with the exception of child support and alimony). Creditors are not able to garnish your wages, put a levy on your bank account, foreclose on your home, repossess your car or move forward with a civil lawsuit against you where a money judgment is involved.
• You have a nonexempt property you want to keep. When you file Chapter 7 bankruptcy you are required to give your nonexempt property to the bankruptcy trustee to sell for payment of the debt. In Chapter 13 bankruptcy you may choose to keep nonexempt assets by paying for them over a three- or five-year repayment plan.
• You have a codebtor you’d like to protect. Chapter 13 bankruptcy filing protects your codebtor as long as you continue to make payments. In Chapter 7 bankruptcy, creditors will still come after codebtors for payment.

Get Experienced Help from the Bankruptcy Experts at Parker & DuFresne

If you’d like to experience freedom from the stress of overwhelming debt, bankruptcy may be the right choice for you. The experts at Parker & DuFresne can help determine which bankruptcy filing is best for your personal circumstances and help you take control of your finances. Contact us today to schedule a consultation.