There are four types of bankruptcy that operate under the Bankruptcy Code, but essentially, most people who come through our doors will file for a Chapter 7 or Chapter 13 bankruptcy. Sometimes people arrive knowing the differences between these two chapters. However, for those of you who aren’t sure, we’ve included a quick guide below:
A Chapter 7 bankruptcy essentially works as a liquidation of assets. Consumers are able to discharge most of their unsecured debts (that is, debts that are not attached to collateral, such as a car or a house). Once a discharge in a Chapter 7 bankruptcy is entered, the debtor’s obligation to pay on any discharged debt has been eliminated. Generally, all that is left to pay after discharge is any non-dischargeable taxes, domestic support obligations and student loans, and any secured debt for property that the debtor wants to keep. Of course, this is the ideal situation for anyone looking at filing a bankruptcy, so what’s the catch? Well, you must qualify for a Chapter 7 bankruptcy, based on your income and household size. It is important to speak with a knowledgeable bankruptcy attorney about qualifying for a Chapter 7 bankruptcy.
A Chapter 13 bankruptcy is a reorganization of debt for consumers with a regular income who don’t meet the qualification requirements for a Chapter 7, or who have a lot of secured, priority or non-dischargeable debt that they want to pay off with less interest over the course of 3-5 years. The payments on this reorganization plan would be one monthly installment to a case Trustee who would then pay your creditors. When the plan is completed in 3-5 years, the bankruptcy discharge will be entered by the Court. The only debts that might outlast a Chapter 13 bankruptcy are any non-dischargeable debts that were not paid completely through the plan. Be sure to speak with an attorney to determine what debts are dischargeable and what might outlast a bankruptcy.
Pros & Cons
A Chapter 7 bankruptcy is probably the easiest, most time-efficient and cost-efficient way to go, however, you may have a unique situation where even if you qualify for a Chapter 7 bankruptcy, there is good reason to file a Chapter 13 bankruptcy instead. In a Chapter 7 bankruptcy your real and personal property are protected from attachment by creditors as long as there is an exemption that you are allowed to take on that property. With a Chapter 13 bankruptcy, it is often possible to save assets that may not be protected in a Chapter 7 bankruptcy.
Deciding which Chapter is best for you truly depends on your individual situation, as every case is different. If you are considering bankruptcy, it is worth making an appointment to speak with an attorney who has experience working with both Chapters. Call us at our office today on 602-265-3000!