Choosing between Chapter 7 and Chapter 13 bankruptcy

If you are an individual considering bankruptcy, you typically have the choice between Chapter 7 and Chapter 13 bankruptcy, as Chapter 11 is rarely used for individuals. As a result, you may want to know which type would be better for you. The answer depends on your personal situation. Although both types of bankruptcies achieve the goal of discharging many types of debt, both types are fundamentally different in their approaches. Because of this, each type is ideal for a different type of debtor.

Different approaches

The main difference between the two types is how they work to relieve you of your debt. During Chapter 7 bankruptcy, your nonexempt property is sold to pay your debt. Although this sounds dire, most of your most important types of property, such as your house or furniture, are at least partially exempt by law and cannot be sold. After the nonexempt property has been sold, you receive a discharge of most of your debts. Because of the nature of the Chapter 7 process, it is best for those who have limited nonexempt assets or little or no income.

Conversely, Chapter 13 bankruptcy is better for those who have a sufficient income to repay at least a portion of their debts. During Chapter 13, there is no sale of your assets. Instead, your debts are consolidated into a payment plan. Under the plan, you keep your property as long as you make payments each month over a three to five-year period, paying off your debts at least partially. Once you have completed making the payments under the plan, the bankruptcy court discharges most of the debt that was not paid in full under the plan.

Different ways of treating debt

Depending on the types of debt that you are struggling with, one type of bankruptcy may be better for you than another. If you are overwhelmed with credit card debt, medical bills or personal loans, both types of bankruptcy would address these types of debts. However, Chapter 13 may be better for debts such as:

  • Jointly held debt: Unlike Chapter 7, Chapter 13 can protect co-debtors on a debt against collection attempts by creditors.
  • Mortgages: Chapter 13 allows you to stop foreclosure proceedings and stay in your home, since you are able to catch up with any missed payments on your mortgage. Chapter 7 can pause the foreclosure process, but cannot completely stop it, unless you repay all of the missed payments or reach an agreement with your lender.
  • Other secured debt: Like mortgages, Chapter 13 can better protect property that is subject to a security agreement (e.g. your car under a car loan) from being repossessed, by allowing you to renegotiate with creditors and catch up with missed payments. In Chapter 7, this type of debt is not dischargeable, allowing the creditor to repossess the collateral once the automatic stay is lifted, assuming no other agreement has been reached.

An attorney can help

Deciding which type of bankruptcy would be right for you is an important step that is best made only after consulting with an experienced bankruptcy attorney. As each type of bankruptcy can affect your long-term interests in different ways, an attorney can ensure that the type of debt relief option you choose keeps your best interests at heart.