Chapter 7 or Chapter 13: Which Bankruptcy Option is Right for You?
If you are in debt and struggling to make your payments each month, you may have questions about filing for bankruptcy. You may have also identified filing for bankruptcy under Chapter 7 and filing under Chapter 13 as your two primary options.
Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code both provide ways for individuals to reduce (or eliminate) their debt and get back on solid financial footing. Filing for bankruptcy under either Chapter can be a good option under the right set of circumstances. But, Chapter 7 and Chapter 13 offer different benefits, and not everyone qualifies to file for bankruptcy under both Chapters. So, how do you choose the option that is best for you?
Key Differences Between Chapter 7 and Chapter 13 Bankruptcies
First, let’s talk about why it is important to choose between Chapter 7 and Chapter 13. While the term “bankruptcy” is often used generally, there are different types of bankruptcies. Filing under Chapter 7 has different consequences than filing under Chapter 13, and choosing the best option for you is critical for ensuring that you get the most out of the process.
Here is an overview of four key differences between Chapter 7 and Chapter 13:
- Liquidation vs. Repayment Plan – Filing for bankruptcy under Chapter 7 involves liquidating (or selling) your assets so that you can pay off your debts for less than the full amount you owe. Although, many assets are exempt, and certain debts are not eligible for discharge under Chapter 7. In contrast, filing for bankruptcy under Chapter 13 involves establishing a payment plan that you can manage month-to-month so that you can pay off your debts over time without facing garnishment, repossession or foreclosure.
- Eligibility Criteria – Since filing for bankruptcy under Chapter 7 involves eliminating much of (if not all of) your debt, the eligibility criteria under Chapter 7 are stricter than those under Chapter 13. To be eligible to file under Chapter 7, your income must be below a certain level based on the state in which you live, or you must satisfy the Chapter 7 “means test.”
- Length of Time on Your Record – A Chapter 7 bankruptcy filing stays on your record for 10 years. In contrast, a Chapter 13 bankruptcy will remain on your record for seven years from the date you complete the process.
- Effects on Your Credit Score – While filing under Chapter 7 means your bankruptcy will stay on your record for longer, since many of your debts will be discharged (or eliminated), you can also start rebuilding your credit immediately. This isn’t necessarily the case when you file under Chapter 13. However, some prospective lenders may still view a Chapter 13 bankruptcy more favorably, as a Chapter 13 filing means that you are still paying your creditors over time.
When Should You Consider a Chapter 7 Bankruptcy?
So, when should you consider a Chapter 7 bankruptcy? Filing under Chapter 7 might be your best option if you are unable to make your monthly payments—and you would still be unable to make your monthly payments even if they were reduced through a Chapter 13 bankruptcy. In this scenario, you will most likely satisfy the Chapter 7 “means test,” although you should speak with a bankruptcy lawyer to make sure.
You will want to make sure your debts (or at least some of your debts) are eligible for discharge under Chapter 7 as well. While liabilities like credit card debt, medical debt and unsecured personal loans are eligible for discharge, student loans and tax debt generally are not.
Before deciding whether to pursue bankruptcy under Chapter 13, you will also want to assess which of your assets will need to be liquidated and which ones are exempt from the bankruptcy process. Exempt assets can include home equity, motor vehicles, pensions and various necessities—among others—and in many cases, Chapter 7 filers will not have to liquidate any of their property.
When Should You Consider a Chapter 13 Bankruptcy?
Now, when should you consider filing for bankruptcy under Chapter 13 instead of pursuing a liquidation bankruptcy under Chapter 7? Here, the deciding factor may be the Chapter 7 “means test.” If you are not eligible to file under Chapter 7, then you may be left with filing under Chapter 13 by default. But there are other considerations as well, including your current income, your future employment prospects, your eligible debts, and the financial relief you will achieve by negotiating a repayment plan—among others.
What If Neither Option is Right for You?
Let’s say you carefully evaluate your options, and you decide that neither Chapter 7 nor Chapter 13 is quite right for you. In this scenario, what can you do to get out from under your unmanageable debt?
While Chapter 7 and Chapter 13 afford two of the main options for securing debt relief, there are various other options available. These include other types of bankruptcies as well as various bankruptcy alternatives. When you meet with a bankruptcy lawyer to discuss your situation, your lawyer can help you explore all of the options that are available to you. Maybe filing for bankruptcy makes sense, and maybe it doesn’t. Whatever the case may be, you owe it to yourself and your family to make a smart decision with your family’s long-term best interests in mind. The key is to take action before your situation gets worse, and you can get started by scheduling a free consultation 24/7.
Request a Free Consultation with Bankruptcy Lawyer Georgette Miller
Do you have questions about filing for bankruptcy? Would you like help choosing between Chapter 7 and Chapter 13? Are you curious about the other options you have available? If your answer to any of these questions is “Yes,” we encourage you to contact us for a free, no-obligation consultation. To speak with bankruptcy lawyer Georgette Miller about your situation in confidence, please fill out our online contact form today.