Finances & Debt

Filing Bankruptcy: Chapter 7 vs. Chapter 13

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You’re at the end of your financial rope. You’ve tried everything — selling off assets, credit counseling and debt consolidation. And you’ve finally decided that bankruptcy is your best option.

Now what?

One of your next steps is deciding which type of bankruptcy to file. There are two types of bankruptcies that individuals can file: Chapter 7 and Chapter 13. The basic difference between the two is that one eliminates your debts and the other involves a payment plan to repay at least some of the debts you owe. Continue reading to learn more about the differences between Chapters 7 and 13 bankruptcy and which one is right for you.

What is Chapter 7 bankruptcy?

Chapter 7 of the U.S. Bankruptcy Code is a form of bankruptcy for people with very limited income. To qualify for Chapter 7 bankruptcy, you have to pass a means test that shows your income falls below a number set by your state. To find out more about the means test and your state’s income levels, visit the Department of Justice website.

If you file for Chapter 7 bankruptcy, you’ll be able to wipe out unsecured debts (like credit cards, payday loans and medical bills).

How Chapter 7 bankruptcy works

Once you file for Chapter 7 bankruptcy, the court selects a trustee for your case. Part of the trustee’s responsibilities include selling off (or liquidating) certain types of your assets. That money will be used to pay your creditors.

Property that could be liquidated under Chapter 7 includes:

  • Cash.
  • Bank accounts.
  • Stocks.
  • Valuable collections.
  • A second home.
  • A second vehicle.

Some of your assets may escape the chopping block, though. Exempt assets may include your primary home, the car you use for work, equipment you use just for work, Social Security checks, pensions, veteran’s benefits, welfare and retirement savings accounts.

What is Chapter 13 bankruptcy?

Chapter 13 of the U.S. Bankruptcy Code restructures your debt (and may eliminate a portion of it) so you can make more manageable payments. With Chapter 13 bankruptcy, you don’t liquidate or lose any of your assets because you are making regular payments to keep them.

Chapter 13 usually works best for people with steady incomes who can manage making regular payments. And if your income is too high to qualify for Chapter 7 bankruptcy, Chapter 13 bankruptcy is your only option.

How Chapter 13 bankruptcy works

Once you file for Chapter 13 bankruptcy, you’ll be assigned a trustee who will help you set up meetings with your creditors and create a payment plan for all or some of your debts over a period ranging from three to five years. The terms of your plan will depend on your income and your debts.

Advantages of Chapter 13 bankruptcy include:

  • Potentially saving your home from foreclosure.
  • Rescheduling secured debts for lower payments.
  • Financial protection of any co-signers.

Which type of bankruptcy is better for you?

The type of bankruptcy that’s right for you depends on a lot of factors. Use the chart below to help you compare Chapter 7 and Chapter 13 bankruptcy.

  Consider Chapter 7 Consider Chapter 13
Your monthly income falls below your state’s median income line.            x  
You’re willing to sell your assets to pay off your debts.            x  
Your debts are mostly unsecured (credit cards, medical bills, payday loans, etc.).            x  
You have steady income.              x 
You don’t want to sell your home, car and other assets.              x
You have a co-signer on your debt that you want to protect.              x

 

Before you file

Keep in mind that bankruptcy is a last resort. It can significantly damage your credit and your overall financial reputation. Think carefully before you decide to file for bankruptcy, and make sure you’ve exhausted all of your other options. You’ll also want to talk to a bankruptcy attorney in your area who is well-versed in your state’s laws and can confirm which type of bankruptcy is best for you.

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