Choosing between Chapter 7 and Chapter 13

One type of consumer bankruptcy may be better for you than another.

If you are struggling with debts that you are unable to pay, you may have heard that bankruptcy may offer a way out. However, since you may also know that there are two primary types of consumer bankruptcy, you may wonder which type of bankruptcy would be right for you. Although both types of bankruptcy may potentially help you, it is important to understand the differences between the two in order to select the one that would benefit you the most.

Chapter 7 basics

In Chapter 7 bankruptcy, a court appointed trustee sells any unencumbered assets that you have that are not protected by bankruptcy exemptions. After the sale, the proceeds are applied towards your debts. Although it may sound like you would lose a significant amount of property, most people contemplating bankruptcy have few nonexempt assets. As a result, most lose little or no property. Once the sale has occurred (if one is needed), most of your remaining debts are discharged.

One of the biggest benefits of Chapter 7 is it is a quick process-often taking as few as three months to complete. However, it is not always the best type of bankruptcy for those facing foreclosure. Although Chapter 7 can pause the foreclosure process, if you are unable to bring your mortgage current soon, your lender may ask the court to allow the foreclosure process to continue. Additionally, Chapter 7 may not be available if you have significant disposable income, since all filers must pass a means test in order to qualify for it.

Summary of Chapter 13

In Chapter 13, there is no sale of assets. During this process, your debts are consolidated into a payment plan. Under the plan, you make monthly payments towards them over a three to five-year period. Although it may seem that all debts must be repaid, in reality, your unsecured debts, such as credit cards or medical bills, have the lowest priority. In most cases, you pay little or nothing towards those kinds of debts as a result. Once the three to five year period is up, most of your remaining debts are eliminated.

Because of its ability to allow you to catch up with your debts, Chapter 13 is a good solution for those facing foreclosure. It allows you to stay in your home and catch up with your missed mortgage payments over three to five years. As long as you make the monthly plan payment, your lender may not resume foreclosure proceedings. At the end of Chapter 13, you are caught up on your mortgage and resume making your normal pre-bankruptcy monthly payments.

Aside from being a slow process, Chapter 13's main drawback is that it requires you to have a steady income in order to qualify for its protection. Unfortunately, this means that some are not in a position to avail themselves of its benefits.

Consult an attorney

Since the right type of bankruptcy for you may not immediately be obvious, it is vital to speak to an experienced bankruptcy attorney before you file. An attorney can assess your situation and recommend the type of bankruptcy that would be the best fit for you.