When you are facing insurmountable debt and need to file bankruptcy, you typically can choose between Chapter 7 and Chapter 13. While both will help you overcome your debt, they do it in very different ways. Learn more about the two types of bankruptcy and how to determine which is best for you.
The Main Differences
The main difference between Chapter 7 and Chapter 13 bankruptcy is how debt is paid. Chapter 7 is a liquidation bankruptcy that requires you to give up and sell assets to pay off your debts. In Chapter 13, you create a repayment plan rather than losing assets. After the completion of what is typically a three to five year repayment plan, the debts than remain which can be discharged are discharged at the end of the case.
Under both types of bankruptcy, certain types of debt cannot be discharged. This includes child support, alimony, restitution orders and a handful of other debts depending on the chapter of the bankruptcy code.
Chapter 7 Bankruptcy
If you cannot afford to repay your debt, Chapter 7 can be the right option for you. To receive the discharge, you will need to prove that you are under a certain income threshold give your specific situation and you’ve not received a bankruptcy discharge in the prior four to eight years. .
If you qualify, some of the benefits Chapter 7 provides includes:
- Once a debt is discharged through bankruptcy, you will not need to pay it back.
- Filing for bankruptcy prevents collectors from harassing you permanently on the discharged debt. Once you file the paperwork with the court, collectors cannot take action against you – including suing you, garnishing your wages, contacting you, and others ways to collect the money.
- Debts can be erased within a few months. In contrast, it can take 3 to 5 years to discharge debts in Chapter 13 bankruptcy.
There are also some negative effects of Chapter 7 bankruptcy you will endure. These can include:
- You may lose some of your assets, although this is generally not the case in the vast majority of Chapter 7 bankruptcy cases.
- Your credit score will fall. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years. This can mean you will be denied credit, or pay a much higher interest rate. Ironically, though, because you are out of debt typically three months after the filing of a bankruptcy, you can often recover your credit score much quicker than you would expect after bankruptcy.*
*The dirty truth of bankruptcy is that almost immediately after you file bankruptcy you will receive a lot of junk mail with credit cards offers and car loan offers.
To learn if Chapter 7 bankruptcy is right for you, and if you are eligible, you need to consult a bankruptcy attorney. A lawyer will also help you determine what debts you can discharge.
Chapter 13 Bankruptcy
When you want to keep your property and you can afford to pay back your debt, Chapter 13 bankruptcy can be the best option for you.
Some things you should know about Chapter 13 include:
- If your income surpasses a certain level, you could be required to file Chapter 13 over Chapter 7.
- Filing Chapter 13 can stop a lender from foreclosing on your house. Bankruptcy can stop the process and give you time to catch up on your payments.
- Like in Chapter 7, when you file Chapter 13 collectors must stop actions to get payments.
- Certain debts are paid or discharged in Chapter 13. These include mortgage and property tax arrearages, car payments, certain tax debts, traffic tickets, and alimony and child support arrearages.
- You will create a repayment plan to repay all or most of your debts over 3 to 5 years. While this lowers the payment you were originally paying and gets rid of your debts, it does mean the process will take several years to complete.
- The impact on your credit will not be as severe with a Chapter 13 bankruptcy as with Chapter 7. It will stay on your credit report for up to 7 years, but lenders can view it more favorably since you are repaying your debt.
If you’re considering filing Chapter 13 bankruptcy, consult an attorney to see if this is the right option for you and if you qualify.
Let Us Help You
When you’re considering filing Chapter 7 or Chapter 13 bankruptcy, let our lawyers at The Law Offices of Alexzander C.J. Adams, P.C. help. We work for you, the people, and not institutions. Contact us for a free case evaluation, or no-obligation consultation. We are dedicated to helping you overcome this small bump in the road and assisting you to get on with your life.