Chapter 7 Bankruptcy vs Chapter 13 Bankruptcy: Which is the Better Choice?
By Tracy L. Hirsch
If you have a mountain of debt that’s keeping you up at night, and you’re not sure how to get on the right track, filing for bankruptcy can be a viable option.
While many people assume that the term “bankruptcy” is equivalent to a four-letter word, it can actually be the impetus to a fresh start where you can gain true financial freedom. If you’ve been researching your options, you’ve probably noticed that there are two types for individuals.
When it comes to Chapter 7 vs Chapter 13 bankruptcy, which is the best choice?
Each option is based on your annual income, personal assets, and total amount of debt. If you’re unsure which option is best for you, your local Louisville bankruptcy attorney can provide legal advice for your specific situation, and help you start the filing process.
In the meantime, here is some helpful information to help you make an informed decision about which option will most likely help you.
There are many factors when determining whether a Chapter 7 or Chapter 13 will give you the most protection. That’s why it’s important to meet with an experienced bankruptcy attorney — to help you make the right choice.
Chapter 7
We’ll start with Chapter 7 Bankruptcy since this is a more popular option for people needing complete financial relief. Filing for a Chapter 7 is an option if you don’t have enough income to make monthly payments toward your total amount of debt.
It’s also known as a “discharge of debts,” meaning that once you have concluded your bankruptcy case (which takes approximately ninety days for a Chapter 7), your liability for many of your credit card balances, medical debts, and other unsecured bills are wiped out.
You can only file for this type of bankruptcy if your income is too low to repay a portion of your debt (a determination that is made based upon your income and household size).
Because Chapter 7 is known as a “liquidation” of assets, many people fear that they’ll have to turn over their personal assets (home, equity in the home, vehicle, etc.) to the court in order to pay off the debts that they owe, but in almost all cases that is simply not true.
There are many exemptions available that allow debtors to protect their real estate, vehicles, household goods, and many other items, including cash. However, you must remain current on your mortgage and car loan payments in order to diminish the risk of losing your home and/or car.
If you qualify for and file a Chapter 7, you are legally released from any obligation to repay any remaining debt. Chapter 7 bankruptcy will stay on your credit report for ten years, but will wipe away all of your debt based on income and other qualifying hardships and individual expenses.
There are certain types of debts that are excluded from discharge, and your bankruptcy attorney can discuss that with you during your consultation.
Chapter 13
When looking into the details regarding chapter 7 vs chapter 13 bankruptcy, most people qualify for Chapter 13. Filing for Chapter 13 Bankruptcy is an option that allows you to pay back at least a portion of your debts over a time period of three to five years.
A Chapter 13 is usually the best option if you make a livable wage, and do not want to risk losing your home, your car, and other valuable assets. It is also much less expensive upfront to file for Chapter 13 bankruptcy and is a great option for individuals already being garnished that have little money for upfront costs.
If you’re not current on your mortgage or car payments, and are facing an impending foreclosure on your house or a repossession on your car, a Chapter 13 can help you keep those assets, while allowing you to make lower monthly payments toward your unsecured debt (credit cards, medical bills, etc.).
If approved, the court will set up a monthly repayment plan (where most of your debts are rolled into one monthly payment) if your income level shows that you can afford the monthly payments. You keep your personal assets, such as your home and vehicle, and if you’re behind on your mortgage payments, they will integrate that past-due amount into your repayment plan.
In many situations, a Chapter 13 Bankruptcy can even help lower interest rates on high interest car loans and furniture installment loans. Old tax liability can be included in a Chapter 13 repayment plan as well.
Under Chapter 13, you have to adhere to a budget that is monitored by the court, and you are assigned a trustee to whom you send your monthly payment. Your trustee uses your monthly payment to pay your creditors (the people and/or companies to whom you owe money). This means that creditors cannot call you and ask you for money, as you are now legally protected due to the bankruptcy filing.
This type of bankruptcy will stay on your credit report for seven years, but will help you keep your most valuable assets while paying back your debt.
What Are My Next Steps?
I offer free consultations, where we meet in person to discuss your financial situation, and create a plan that will give you a fresh start.
To schedule your consultation, please call me or text me at (502) 435-2593. I look forward to working with you!