If you need to file for bankruptcy, you will need a bankruptcy attorney on your side to ensure that you get the best possible outcome. We get asked all the time what the difference is between chapter 13 bankruptcy and chapter 7 bankruptcy.
What is Chapter 13 Bankruptcy?
A chapter 13 bankruptcy is a way for those with a regular income to create a plan in order to pay off all or at least a part of their debts. This usually involves a payment plan that spans three to five years. However, in no case can a plan allow for payments lasting longer than five years.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcies allow the trustee to gather and sell the debtor’s nonexempt assets. The proceeds from these sales go to pay the creditors as the provisions of the Bankruptcy Code allow. This means that the debtor’s property might be subject to liens and mortgages that mean the property would belong to other creditors. However, there are some exempt property exceptions. Regardless, those who are considering a chapter 7 bankruptcy must understand that it might end in the loss of property.
When to Choose Chapter 13
When is the right time to choose chapter 13? The following reasons all may require you to choose chapter 13:
- You do not qualify for chapter 7. If a debtor doesn’t qualify under the “means test,” then they cannot file for chapter 7. Their income may exceed the median income in the state, meaning that there is disposable income to help them repay their debts.
- You want to repay the debt. In chapter 13, the debtor gets to make payments towards the debt over the next three to five years. Debtors get a bankruptcy trustee who is responsible for giving this money to the creditors. However, the debtor needs to have enough income to cover the priority and secured debt in full.
- You don’t want your home to be foreclosed on. Filing for chapter 13 is a way to avoid a foreclosure. Once the court confirms your payment plan, you can work on paying back the missed payments. However, keep in mind that a chapter 13 will not be able to protect your home from foreclosure if you have filed for bankruptcy within the past two years and the bankruptcy court decides to lift the automatic stay. In a chapter 7, it’s hard to keep a home if you are behind on mortgage payments.
- You don’t want your car to be repossessed. You can stop your car from being repossessed if you file for a chapter 13 and add in a plan to pay off the car in your repayment plan. If you purchased the car two years or more before filing for bankruptcy, then the amount owed on the loan may be able to be reduced.
- You have debts that cannot be discharged under a chapter 7. Some debts will still need to be repaid under a chapter 7, but they can be discharged under a chapter 13. For example, a chapter 13 might discharge debts that were incurred to pay nondischargeable taxes, court fees, marital debts, and fees from a homeowners’ association.
- You have a co-debtor. Chapter 13 will typically protect any codebtors for a joint debt as long as the creditor gets payment through the repayment plan. However, if there is still debt left over after the plan ends, then the creditor might collect the rest from the codebtor. Chapter 7 will free the original debtor from payment, but the codebtor will usually remain responsible.
When to Choose Chapter 7
If a chapter 13 isn’t going to work with your situation, that’s alright. Chapter 7 is the way to go if:
- You can’t pay the debt in a repayment plan. Sometimes, you may not be able to afford to pay back your creditors for five years. If so, you may qualify for chapter 7.
- You need fast relief from creditors. It could take as little time as three months to get a discharge order, meaning that you would no longer have any personal liability for the debt that was discharged.
- Most of your debt can be discharged. If your debt can be discharged, a chapter 7 might free the debtor from personal liability. This can include medical bills, personal loans, and credit card debt.
If you are searching for help from a legal professional during your impending bankruptcy, it’s time to contact a bankruptcy attorney. We can help you determine which chapter makes the most sense for your personal financial situation. Without the proper guidance in your bankruptcy case, you could end up in more of a mess. Contact the professionals who can guide you as you work towards a resolution. We look forward to helping you during this challenging time and assisting you as you get back on your feet. Reach out today for a consultation; we can’t wait to hear from you!