How to Choose Between Chapter 7 and Chapter 13 Bankruptcy

If you are thinking of filing for bankruptcy, you should know about the bankruptcy code. It is similar to a book in a library – while the United States Code has titles, the bankruptcy code is Title 11 and contains some chapters. For individuals and small businesses, the concerned chapters are Chapters 7 and 13. Before filing for bankruptcy, you should know which one of them best suits your needs.

Chapter 7 Bankruptcy

It is the most commonly opted bankruptcy chapter for individuals, especially those with a low income and few assets. It is referred to as a “liquidation plan” as your non-exempt assets are liquidated by the bankruptcy trustee in order to raise cash to pay off creditors. 

Under this chapter, you get to decide whether you want to keep your property or give it up. However, you need to pay to keep property that is exempt under the law. Or else, the court will take your property and sell it to pay your creditors. You can file also for bankruptcy under this chapter to discharge most types of unsecured debts such as credit cards, medical bills, and personal loans. But you can’t discharge certain kinds of debts, such as federal or state taxes, and student loans.

The main advantage of Chapter 7 bankruptcy is that it is fast. You can usually discharge your debts within a few months. There is a slight disadvantage as well since you may lose some of your property. Also, you may have to repay the creditors out of your pocket.

Chapter 13 Bankruptcy

It is sometimes referred to as reorganization or wage-earner’s bankruptcy. Under this chapter, you have to create a plan to repay some or all of your debts. However, the good thing is you don’t have to give up your property. This is the main advantage of Chapter 13 – retaining your property during bankruptcy. Once you file under this chapter, you can stop foreclosure proceedings and may cure delinquent mortgage payments over time. But you will have to timely make all mortgage payments that come due during the chapter 13 plan. Some more advantages of this chapter are that you can easily qualify for it and get lower monthly payments on your debts.

The disadvantage of Chapter 13 bankruptcy is that it takes more time and money. It usually takes several months or more for this bankruptcy and it may turn out to be more expensive than Chapter 7 bankruptcy.

The federal bankruptcy laws enacted by Congress in the United States are aimed at giving an opportunity to the debtors that offer them a financial “fresh start” from burdensome debts. So, if you are having a difficult time with your debts, you should evaluate your situation (or get hold of a bankruptcy lawyer) and determine which Chapter’s bankruptcy you qualify for. 

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One comment

  1. Before you file for bankruptcy, you should consider whether filing for Chapter 13 is the best option for you. Chapter 13 is not for everyone. While it offers many advantages over Chapter 7 filings, including the ability to keep your home and additional family vehicles, Chapter 13 filers must maintain a certain monthly income to qualify.

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