Chapter 7 or Chapter 13:  Which one is right for you?

Are you someone who is struggling to pay off his current outstanding debts and is debating whether or not to declare bankruptcy?

Well, before you take the plunge into the bankruptcy bandwagon, it is important to understand what it is all about and how it will impact your credit score and all your other financial records. Although there are attorneys who agree to help those who have incurred debt of a total amount of $5000, you should remember that your debt should be large enough to satiate the personal consequences and the legal expenses  of the step that you’re about to take.

Among the different kinds of bankruptcies, the most common kind which is usually filed with the consumers with an overwhelmingly large amount of debt are Chapter 7 and Chapter 13 bankruptcy. If you’re someone who is totally ignorant about the ways in which the former differs from the latter, you may read on the concerns of this article.

Chapter 7 bankruptcy – Understanding the process

When you file Chapter 7 bankruptcy, you actually ask the bankruptcy court to discharge all or most of your debts that you owe. In lieu of this discharge, the trustee can take any kind of property that you own and that is not exempt from collection, sell it and the disburse the proceeds of the sale to your hungry creditors.

When is it commonly used: When you have very little property apart from your basic necessities like clothing and furniture. When you have little or no money left after meeting the basic necessities of your life, you may file for Chapter 7 bankruptcy.

The advantages: Most of your unsecured debts can be discharged in bankruptcy, the process moves pretty fast and you may attain a discharge from your debts within a matter of 4-6 months. The creditors and the debt collection agents can’t contact you during the “automatic stay” as they’re legally not supposed to call you.

The qualification criteria: All those debtors who have qualified under the ‘means test’ and also gone through a successful session of credit counseling with the qualified credit counselors can opt for Chapter 7 bankruptcy. The ‘means test’ requirement was added after the 2005 changes to the Bankruptcy Code.

 Chapter 13 bankruptcy – Understanding the process

When you file Chapter 13 bankruptcy, you keep your property along with you but pay back a certain portion of all your debts over a period of 3-5 years. This is not like Chapter 7 bankruptcy where a large portion of your debts are discharged and you may require surrendering some property to the trustee. Since you end up paying most of your debts, you can also call this reorganization bankruptcy.

When is it commonly used: When you have significant equity in your home or some other property that  you want to keep, you can file for Chapter 13 bankruptcy. When you also have regular income and can pay down your living expenses but you simply can’t pay off your debt obligations, this is perhaps the best option for you.

Advantages of Chapter 13 bankruptcy: You may also retain your property while repaying your payments throughout a stretched period of time. You will have at least 3-5 years to catch up on all those delinquent accounts as per the instruction of the bankruptcy trustee and the court. While you will have no direct contact with your creditors, you’ll have to make a single monthly payment to the bankruptcy trustee during the protection period.

The qualification criteria: If you’re an individual debtor who has incurred unsecured debts which are below $360,475 and secured debts which are below $1,81,400, you will be eligible to file for Chapter 13 bankruptcy.

Therefore, after going through the concerns of this article, you must have been able to strike out the differences between Chapter 7 and Chapter 13 bankruptcy.  Avoid debts by taking into account the other bankruptcy alternatives that are available to put an end to your soaring personal liabilities.

If you found this article helpful you might want to take a look at these:

Failure to Pay Real Estate Taxes May Cause Loss of Property

What are Tennessee Exemptions?

Thank you to our guest author Stacy Becker who writes about consumer matters.