Chapter 13 vs Chapter 7 Bankruptcy: When to Choose One Over the Other
Overview of Bankruptcy Types
Bankruptcy is a legal process that allows individuals and businesses to either restructure their debts or get rid of them completely. Two common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Each has its own set of rules and purposes, making it important to understand the differences before deciding which one to file. This article will delve into the circumstances under which one might be more advisable than the other.
Chapter 13 Bankruptcy: Staying Afloat While Paying Off Debts
Chapter 13 bankruptcy, also known as a Chapter 13 reorganization, is an option that is particularly beneficial for individuals with a steady income who want to keep certain assets. This form of bankruptcy provides a way to restructure debts and create a repayment plan that typically spans three to five years. Here are some scenarios where Chapter 13 might be the best choice:
Home or Car Retention: If you have a steady income and a desire to keep your home or car, filing for Chapter 13 bankruptcy allows you to do so. Your home or car might otherwise be sold in a Chapter 7 liquidation to pay off creditors. Secured Debt Management: Chapter 13 is often preferred for individuals who are behind on secured debts such as a mortgage. You can create a plan to make future payments while paying back your past due amounts over the course of the three to five-year plan. Co-Signers Protection: If you have co-signed debts, Chapter 13 provides protection for co-signers on certain debts. This can be especially important in scenarios where the debtor is unable to make payments. High Income or Asset Value: If your income or asset value exceeds the eligibility limits for Chapter 7, Chapter 13 can still provide an avenue for restructuring your debts. This form of bankruptcy does not have the same asset limits as Chapter 7.Preparation for Filing Chapter 13
Before filing for Chapter 13, it is advisable to consult with a lawyer who specializes in bankruptcy law. They can help you determine the best course of action for your specific situation. As a general guide, if you have a steady income and wish to keep assets like your home or car, you should consider Chapter 13. Additionally, if you have a means to pay back your debt or if you have secured debts that need restructuring, this form of bankruptcy could be the solution.
Chapter 7 Bankruptcy: The Liquidation Process
Chapter 7 bankruptcy, on the other hand, is a liquidation process. This form of bankruptcy is typically chosen by individuals who do not have the means to repay their debts. Some common scenarios where Chapter 7 might be more advisable include:
No Assets or Minimal Assets: When most of your assets are liquidated to pay off creditors, this is often referred to as a "no asset" bankruptcy. Chapter 7 is the most straightforward option for individuals in this situation. High Medical Bills or Credit Card Balances: If you are burdened by high medical bills or credit card balances, filing for Chapter 7 can provide immediate relief by discharging unsecured debts. These debts are not paid back but are eliminated. Affordable Ineligibility Limits: As of 2005, federal bankruptcy laws introduced new exemptions. These exemptions determine which assets and debts are protected during the liquidation process. If your income or asset value is below the eligibility limits, Chapter 7 may be the better choice.Typical Debt Scenarios in Chapter 13 and Chapter 7
Typical Chapter 13 Scenarios
When facing a house or car and needing to retain them, Chapter 13 is often the preferred choice. This process allows debtors to pay 10-30 percent of their unsecured debt over a 36-month period. Simultaneously, any arrears on secured debts, such as mortgage payments, are paid over the same period. Debtors are also required to cover their current expenses during this process.
Typical Chapter 7 Scenarios
On the other hand, Chapter 7 'No Asset' filings are common in situations where high medical bills or credit card balances have overstressed the financial situation. In the 1990s, each state had the choice between federal or state exemptions for protecting equity or assets. Since 2005, the rules have been more standardized. However, individuals with significant equity in a house or valuable cars are less likely to opt for Chapter 7 liquidation.
Conclusion
Choosing between Chapter 13 and Chapter 7 bankruptcy depends on the specific circumstances of your financial situation. Factors such as your income, assets, and the nature of your debts play a crucial role in determining the most suitable form of bankruptcy. Consulting with a professional bankruptcy lawyer can help you make an informed decision and guide you through the complexities of the process.