Many people have reservations about bankruptcy. It is not always looked at favorably, but in some cases, it can be a person’s best choice.
So, when a person does make a decision to file for bankruptcy, they want to choose the right one. Chapter 7 and Chapter 13 are the main types of bankruptcy for consumers. Which is better for you? Here’s what you need to know.
When Should I Choose Chapter 7?
Chapter 7 bankruptcy is a good option for those who have a lot of unsecured debt but very few assets. Unsecured debt refers to debt created without any collateral promised to the creditor like credit card debt or unsecured loans. With chapter 7, most debts will get wiped out, and no payment plan is required. However, this part is not necessarily easy. Chapter 7 is also known as liquidation bankruptcy because you may have to sell some of your assets to repay debts. Once this is done, you will likely be relieved of your debts completely.
Chapter 7 bankruptcy is not available to everyone, though. It requires a means test to check your income. You need to have an income low enough to pass two financial tests. Also, Chapter 7 is not a good option for those who are facing foreclosure or repossession and want to keep their assets. It also cannot wipe out student loans, tax debts, or child support.
When Should I Choose Chapter 13?
If you do not pass the Chapter 7 means test, then you can still opt for Chapter 13. Chapter 13 is a good option if your income is too high or you have property, such as a house or a car, that you want to keep.
With Chapter 13 bankruptcy, your debts are not wiped out. Instead, you make payments and hold onto your property by working on a payment plan that lasts three to five years. Chapter 13 bankruptcy allows you to catch up on missed payments overtime and keep property associated with secured debt.
Chapter 13 offers a powerful benefit if your residential home is worth less than you owe. Chapter 13’s “lien stripping” mechanism lets you remove a “wholly unsecured lien” from your home. A wholly unsecured lien would be a junior loan that would not receive a penny if you were to sell your house.
Chapter 13 offers what is called an automatic stay. This is an order that stops creditors from garnishing your wages and taking money out of your paycheck. It also prevents bank account levies, foreclosure on a home, and repossession on your car.
Choosing the right solution
The right bankruptcy for you will depend on your situation. Many people prefer Chapter 7 if they can qualify because unsecured debt is wiped out, but each individual situation is different. If your income is too high or you have assets you do not want to liquidate, then Chapter 13 may be better suited to you.
Get Help Making the Decision
A good bankruptcy lawyer can assess your financial situation and give you the advice you need to make a decision about filing bankruptcy and what chapter will be best for you.
