Deciding whether or not to file for bankruptcy is never easy. If you have exhausted all other options, feel like you are drowning in debt and unable to make ends meet, bankruptcy may be a way to end the vicious cycle.
Once you’ve made the decision to file for bankruptcy, it is important to understand which option is best for you. Chapter 7 and Chapter 13 Bankruptcy are the most common solutions for individuals. Understanding the difference between the two can help determine which is the right approach for your circumstances.
What is Chapter 7 Bankruptcy?
Chapter 7 Bankruptcy can be used by both individuals and businesses. This type of bankruptcy has income guidelines and is defined as “liquidation bankruptcy.” Under Chapter 7, most unsecured debts, like medical bills and credit cards, are dissolved, and there no payments to creditors. However, individuals filing Chapter 7 could be at risk of losing assets if they have them, as they are required to be sold to pay back debt. If there are no assets that can be sold, then creditors would not receive anything for the debt owed to them.
After filing Chapter 7, a bankruptcy trustee is assigned to the case and due to an automatic stay order, creditors should no longer contact individuals to collect any debt owed. One of the benefits of filing Chapter 7 rather than Chapter 13 is that debt may clear faster.
Under Chapter 7, it only takes three to four months to discharge the bankruptcy. Chapter 13 takes anywhere from three to five years to complete the entire process. One of the biggest downsides of filing a Chapter 7 bankruptcy is that it will remain on a credit report for up to 10 years and can potentially lower credit scores making it harder to buy a home or purchase a car without having a higher-than-normal interest rate.
What is Chapter 13 Bankruptcy?
Unlike Chapter 7, Chapter 13 is only an option for individuals. This type of bankruptcy reorganizes debt into a repayment plan. Chapter 13 Bankruptcy is typically for people that are in a situation where they have enough income to pay back some of their debt but may not be able to pay under the original terms.
Debtors typically choose to file a Chapter 13 Bankruptcy due to some of the advantages over filing Chapter 7. Chapter 13 does not require assets to be sold to pay back creditors and can also allow debtors to catch up on delinquent mortgages and taxes. The repayment plan is based on the individual’s situation, such as income, current expenses, and the type of the debt being repaid. Ultimately, one payment is disbursed among the various creditors. The repayment plan is usually set up for three to five years until all the debt has been repaid. The bankruptcy is not discharged until the repayment plan is complete.
Individuals that have fallen on hard times and may have missed mortgage payments, for example, often opt for Chapter 13. Under Chapter 13, any type of foreclosure proceeding or debt collection stops.
Similar to Chapter 7, Chapter 13 can also impact credit scores. However, because of the commitment to a repayment plan under Chapter 13, some creditors view it more favorably than a Chapter 7 where the debt is wiped out. Chapter 13 Bankruptcy can remain on a credit report for up to 7 years.
When to Hire an Attorney
Everyone’s situation is different and what may have been the right choice for an acquaintance or family member may not be the best option for your circumstances. This is why it is always best to hire an experienced bankruptcy attorney to assist you in deciding which path truly meets your needs.
If you’re feeling overwhelmed by debt, reach out to the team at Mette, Evans & Woodside for compassionate & experienced guidance.
Author: Tracy Updike, Esq.
Contact Tracy for your judgment-free bankruptcy consultation.