Bankruptcy: Chapter 7 or Chapter 13?

If you’ve made the decision to file bankruptcy to get a fresh financial start, here are some things to consider in choosing between Chapter 7 or Chapter 13. Be aware, however, that your income and expenses have a lot to do with which chapter you will be able to file because the courts do consider your ability to pay when you’re applying for debt relief. For starters, below are some of the basic things you need to know.
Under Chapter 7, you receive a fresh start by having most debts wiped out (“discharged”). This includes most unsecured debt except student loans, alimony, child support, most taxes and debts incurred by fraud. If you have non-exempt assets, you may possibly have to sell them to pay creditors. However, most filers do not. For example, almost 100% of my clients keep everything and lose nothing at all by filing Chapter 7.
Under Chapter 13, you must still pay off all or some of your debts over a 3–5-year period. Priority debts (example, IRS taxes and back child support) must be paid in full while unsecured debts are paid either a percentage or in full, depending on how much you can afford. You also pay 0% interest on almost all debts like credit cards, personal loans, and other unsecured debt.
The discharge of debt under Chapter 7 usually occurs within 5 months, as opposed to the 3–5-year repayment plan under Chapter 13. Chapter 7 stays on your credit report for 10 years while Chapter 13 stays on it for 7 years- both from the date of filing. Most people can rebuild their credit, however, much sooner than 7-10 years from their bankruptcy case filing date by timely paying debts that are reported to the major credit bureaus.
There is no limit on the amount of debt you may have if you are filing Chapter 7. However, Chapter 13 does have limits for both secured and unsecured debts (recently increased to 2.8 million- combined).
The important thing to remember is that not because you want to file Chapter 7 necessarily means that you can do so. Not everyone is eligible. If the court thinks that your income is sufficient to fund a Chapter 13 repayment plan, then your Chapter 7 petition will be denied.
Under current law, you can only file a Chapter 7 once every 8 years so if you’ve had a recent bankruptcy and you find yourself in debt again, you may not have a choice but to file a Chapter 13. Your bankruptcy attorney can review all relevant dates and advise you what is possible and best for your situation.
Ray Bulaon is a bankruptcy attorney and business debt mediator in Valencia who has successfully helped more than 6,000 clients in getting out of debt. For a free consultation, call 866-477-7772 or 661-775-4880.