Information in this article does constitute legal advice, is for informational purposes only and may not constitute the most up-to-date information. Readers should contact their attorney for advice to any particular legal matter.
If you're considering filing for bankruptcy as an individual, you'll likely choose between two main types: Chapter 13 and Chapter 7. It's important to understand the key differences between these options before deciding which one is right for you.
Chapter 13 bankruptcy involves creating a repayment plan to pay off your debts over a period of three to five years. This option is ideal for those who have a regular income and want to keep their assets, such as a home or car. On the other hand, Chapter 7 bankruptcy involves liquidating your assets to pay off your debts. This option is best for those who don't have a regular income and don't mind losing their assets.
Ultimately, the decision between Chapter 13 and Chapter 7 will depend on your financial situation and goals. It's important to consult with a bankruptcy attorney to determine which option is best for you.
What is Bankruptcy?
Bankruptcy is a tough situation that can arise when someone is unable to pay their debts after taking care of their basic living expenses. It could happen due to unforeseen circumstances such as job loss or unexpected medical expenses, or because of excessive debt. However, declaring bankruptcy is not as scary as it sounds. In fact, it can be an opportunity to get back on track and build a stronger financial future.
The primary goal of filing for bankruptcy is to get help managing your debt and starting fresh. There are different types of bankruptcy, but the two most common for individuals in the US are Chapter 7 and Chapter 13. Each type has its own set of differences and benefits. This article will guide you through the variations and help you determine if Chapter 13 is the right choice for you.
What are the Differences Between Chapter 13 and Chapter 7 Bankruptcy?
If you're struggling with debt, bankruptcy can be a viable solution to get back on track financially. Both Chapter 7 and Chapter 13 bankruptcy share the same goal - to help you become debt-free and achieve financial stability. However, the way they achieve this goal differs.
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves selling your assets to pay off your debts. This type of bankruptcy is ideal for those with little to no income and a significant amount of unsecured debt, such as credit card debt or medical bills. The process is relatively quick, typically lasting only a few months, and can provide a fresh start for those struggling with overwhelming debt.
On the other hand, Chapter 13 bankruptcy, also known as reorganization bankruptcy, involves creating a repayment plan to pay off your debts over a period of three to five years. This type of bankruptcy is ideal for those with a steady income and a significant amount of secured debt, such as a mortgage or car loan. While the process takes longer than Chapter 7, it allows you to keep your assets and can provide a more manageable path to debt relief.
Ultimately, the decision to file for bankruptcy depends on your unique financial situation. It's essential to consult with a bankruptcy attorney to determine which type of bankruptcy is right for you and to understand the benefits and challenges of each option.
Chapter 7 Bankruptcy
Let's talk about Chapter 7 bankruptcy, also known as ‘liquidation bankruptcy.’ It's called that because when you file for Chapter 7 bankruptcy, you'll be liquidating some of your assets. A bank trustee will be appointed to oversee the process and determine which assets are non-exempt. You may be able to keep your house, car, and smaller possessions, but any excessive things like second and third cars or secondary properties will be liquidated to pay back your creditors.
The process is relatively quick, and at the end of it, the court has the potential to forgive most of your debt. However, there are some debts that the court cannot forgive in both Chapter 7 and Chapter 13 bankruptcy, such as alimony, child support, and government debts. Other than these things, you can typically have some, if not all, of your debt forgiven.
Chapter 7 bankruptcy is more suitable for individuals who are unable to continue making payments on their debts. If you still have some disposable income at the end of every month, Chapter 13 bankruptcy may be better suited for you.
Chapter 13 Bankruptcy
If you're struggling to pay off your debts, Chapter 13 bankruptcy may be a viable option for you. This type of bankruptcy involves creating a new plan to pay off your debts. Here's how it works:
- First, a bank trustee will review your financial situation to determine if you qualify for Chapter 13 bankruptcy.
- You'll need to submit a proposed repayment schedule that outlines how you plan to pay off your remaining debt.
- During the bankruptcy process, you'll commit to using all of your disposable income (the money you have left over each month after paying for necessary expenses) to pay off your debt.
- The entire process can take between 3-5 years, but there are many benefits to choosing Chapter 13 bankruptcy over Chapter 7.
By filing for Chapter 13 bankruptcy, you'll have the opportunity to pay off your debts in a manageable way, without losing your assets. Plus, you'll have the added benefit of protection from creditors during the repayment period. While the process can be lengthy, it can provide a fresh start for those struggling with debt.
One of the biggest challenges in Chapter 13 may be whether you can afford your Chapter 13 payment plan. As such, please consider taking the free Chapter 13 calculator below.
Reasons You May Choose Chapter 13 Bankruptcy
You Can Keep Your Assets:
When you file for bankruptcy, there are two main options: Chapter 7 and Chapter 13. If you choose Chapter 7, you'll need to transfer all your assets to the bank trustee, who will then decide what to do with them. If the assets are valuable enough, the trustee may sell them to pay off your debts. However, even if they're not, you may still need to buy them back from the trustee. On the other hand, if you opt for Chapter 13, the trustee won't liquidate your assets to pay off your debt. Instead, they'll help you create a new debt payoff schedule and ensure you stick to it.
While Chapter 7 may seem more daunting, it's important to note that not everyone is eligible for it. You need to pass a means test to qualify, which takes into account your income and expenses. Additionally, while Chapter 13 doesn't involve liquidation of assets, it does require you to have a steady stream of income to meet your new repayment plan. It's also worth noting that both types of bankruptcy will impact your credit score and stay on your credit report for several years.
You Are Not Eligible For Chapter 7 Bankruptcy:
If you're considering filing for bankruptcy, it's important to note that there are strict requirements and qualifications to meet. In some cases, you may not qualify for Chapter 7 bankruptcy. This can happen for various reasons, but don't worry – you may still be eligible for Chapter 13 bankruptcy.
Chapter 13 bankruptcy is a type of bankruptcy that allows you to reorganize your debts and create a repayment plan over a period of three to five years. Unlike Chapter 7, which involves liquidating your assets to pay off your debts, Chapter 13 allows you to keep your property while you pay off your debts through a court-approved plan.
While Chapter 13 may seem like a more favorable option, it's important to note that it also comes with its own set of challenges. For example, you'll need to have a steady income to make your monthly payments. Additionally, the repayment plan can be quite complex and may require the help of a bankruptcy attorney to navigate.
Ultimately, whether you qualify for Chapter 7 or Chapter 13 bankruptcy depends on your unique financial situation. If you're unsure which option is right for you, it's best to consult with a bankruptcy attorney who can guide you through the process and help you make an informed decision.
Protect Your Codebtor:
When you file for bankruptcy, the court grants you an automatic stay, which stops your creditors from collecting the debts you owe. However, if you have a codebtor, someone who shares a debt with you, this could create a problem. For instance, a codebtor could be a cosigner or a spouse who isn't filing for bankruptcy with you. In Chapter 7 bankruptcy, your codebtor is not protected under the automatic stay, which means the creditors can go after them to collect the debt. But, if you file for Chapter 13 bankruptcy, a 'codebtor automatic stay' applies, which prevents creditors from pursuing your codebtors for payment. So, if you want to protect your codebtors, consider filing for Chapter 13 bankruptcy.
Pay Debt Out Over Time:
Are you struggling to make full payments on your debts? Don't worry, you're not alone. But did you know there's a solution that can help you get back on track? It's called Chapter 13 bankruptcy.
Chapter 13 bankruptcy is designed for individuals who are able to make some payments on their debts, but not the full amount. The goal of this type of bankruptcy is to spread out your payments over a longer period of time, making it easier to manage your finances and stay on top of your payments each month.
With Chapter 13 bankruptcy, you'll work with a court-appointed trustee to create a repayment plan that fits your budget. This can include reducing the amount you owe, lowering your interest rates, and extending the length of your loan. By doing so, you'll be able to make affordable payments each month and gradually pay off your debts over time.
While Chapter 13 bankruptcy can be a great solution for those struggling with debt, it's important to understand that it's not without its challenges. For example, it can take several years to complete the repayment plan, and you'll need to have a reliable source of income to make your payments each month. However, if you're committed to getting your finances back on track, Chapter 13 bankruptcy can be a powerful tool to help you achieve your goals.
Other Alternatives to Consider
Are you thinking about declaring bankruptcy, but feel like Chapter 7 and Chapter 13 are too extreme for your circumstances? Don't worry, there are other options available. Let's take a look at a few:
Debt Consolidation
Debt Settlement
Financial Counseling
Debt Management Plan
Exploring these alternatives could help you avoid the need to file for bankruptcy in the first place.