Chapter 7 vs. Chapter 13 Bankruptcy – Which Option is Best for You?

When filing for bankruptcy, you will have the option to file a Chapter 7 or a Chapter 13 bankruptcy.  Choosing the type that works best for your situation will mean the best chance at a successful recovery.  However, it’s important to understand the difference and special features of each type to make the best choice.

Chapter 7 Bankruptcy

A Chapter 7 is the most common form of bankruptcy, often referred to as a “straight bankruptcy”, and is a complete liquidation of assets.  This is the fastest option, often resulting in discharge within four months.  Individuals are eligible to file a Chapter 7 bankruptcy once the Chapter 7 means test is passed, proving low disposable income.  In this type of insolvency, nonexempt assets are sold to pay creditors.  Any remaining debts, once creditors are paid from available assets, are discharged. 

This option may be best for individuals who are not homeowners, have few assets, or low income.  While discharge can be achieved quickly in a Chapter 7, it’s important to remember that a bankruptcy stays on a credit record for 10 years.  The Chapter 7 option also does not provide a way to catch up on missed payments and may not prevent a foreclosure or repossession. 

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is less common, but offers an alternative to liquidating assets.  This option creates a plan for repayment of debt over a period of several years and is considered a reorganization of debt, not a liquidation.  Once approved by the court, creditors must not contact the individual for repayment, thus ending the harassing phone calls. 

In a Chapter 13, individuals must meet certain eligibility conditions regarding the amount of secured and unsecured debt.  Filers are able to keep property, catch up on missed payments and sometimes even bring down the principal loan balance through a loan cramdown.

The Chapter 13 option is best for individuals who make a regular income and for those who earn too much to qualify for a Chapter 7.  It’s also best for those who wish to keep property and avoid foreclosure or repossession and can commit to a payback plan. 

Credit Counseling & Debtor Education

In both Chapter 7 and Chapter 13 bankruptcies, filers must complete pre-filing credit counseling and post-filing debtor education.  The first course provides an overview about alternatives to bankruptcy.  The second course offers financial management tips and advice for recovering after bankruptcy.  Sage Personal Finance is partnered with Abacus Credit Counseling (www.abacuscc.org) to provide the first course and offers the second course at http://www.sagepf.com.  

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