When bankruptcy is filed in the U.S., it is typically one of two types: Chapter 7 or Chapter 13. How does one decide which to file for?
Chapter 7 bankruptcy can be thought of as a liquidation bankruptcy. Chapter 11 can be thought of as a reorganization bankruptcy.
Under Chapter 7, individuals and business entities are able to file. Under Chapter 13, only individuals, including sole proprietors, are able to file.
Benefits of Chapter 7 Over Chapter 13
Typically, Chapter 7 is the quicker option. Under Chapter 7, you are able to keep most of your property, and you aren’t locked into a long-term repayment plan.
If you don’t have a lot of property you wish to keep, or you have a lot of credit card, medical or personal loan debt and your family income doesn’t exceed the state median for a family the same size as yours, Chapter 7 may be the right choice for you.
However, know that high-income filers may be better off in Chapter 13. If much of your debts are student loans or things like child support, know that those are not wiped out in bankruptcy. And if you are worried about losing substantial equity in a property, Chapter 13 may be a better choice.
Benefits of Chapter 13 Over Chapter 7
Some people simply are not eligible for Chapter 7. If your current monthly income over the last six months is more than the median household income for your family size, you cannot file for Chapter 7. If your disposable income exceeds certain limits set by law, you cannot file for Chapter 7. In these cases, Chapter 13 is your best option.
Chapter 13 has other benefits as well. It is a valuable tool for people who are behind on a mortgage or car loan. Through Chapter 13, you can restructure those debts and make payments on your missed payments over time. You can include certain debts that are ineligible for discharge under Chapter 7 in your Chapter 13 repayment plan. If you have nonexempt property you don’t want to lose, Chapter 13 can help you keep it. And if you have a codebtor, Chapter 13 will keep the creditors off your codebtors back as long as you keep up payments.
Discuss your finances with a bankruptcy attorney to determine whether Chapter 7 or 13 is best for you.