We all go through money troubles at some point in our lives, but none of them is as daunting as intimidating as going bankrupt. But despite the negative connotation often associated with it, declaring bankruptcy offers individuals and businesses a way out of financial difficulty.
Most people who file for bankruptcy have one common goal – to receive possible debt relief. What many aren’t aware of, however, is that there are different types of bankruptcy. As for personal bankruptcy programs, they are usually filed either under Chapter 7 or Chapter 13 bankruptcy.
Understanding the Types of Bankruptcy: Chapter 7 vs. Chapter 13 Bankruptcy, What’s The Difference?
If you think declaring and filing for bankruptcy can save you from your present financial struggles, you need to learn more about the different types of bankruptcy and what they entail. Whether or not the court decides to relieve you of your debt heavily depends on your level of preparedness and, of course, the competency of the bankruptcy attorney you hire. We’ll explain the differences between Chapter 7 vs. Chapter 13 Bankruptcy below.
Chapter 7 Bankruptcy
People who find themselves dealing with substantial unsecured debts like medical and credit card bills mostly file their bankruptcy cases under Chapter 7. Of the different personal bankruptcy programs, this type is the more common.
Chapter 7 is a form of liquidation bankruptcy. When you file your bankruptcy case under Chapter 7, all your nonexempt assets will be reviewed and sold off with the help of the trustee. The bankruptcy court will then divide the money made from the sale among your creditors and discharges what remains of your unpaid unsecured debts.
Many people choose to file for Chapter 7 because it offers immediate debt relief after the sale of their nonexempt assets. If you have minimal nonexempt properties, then your creditors get almost nothing. Keep in mind, though, that only your unsecured debts are discharged. If you have secured debts – a mortgage or a car loan – you either relinquish them or continue paying according to the contract.
While Chapter 7 may seem like an excellent opportunity to get out of debt, it is not for everyone. It’s a favorable option for people with little-to-no properties or those whose dischargeable debts amount to way beyond their nonexempt assets. Still, only debtors whose income falls on or under the income threshold may qualify. If you’re earning more than set state limit, then you may have to file under Chapter 13.
Chapter 13 Bankruptcy
While Chapter 13 liquidates your assets to pay off your liabilities, Chapter 13 only reorganizes your debts and buys you more time to settle them. Chapter 13 can be a good option for people whose earnings are enough to cover an adjusted repayment of their debts.
When you file for Chapter 13, the court will total all your debt obligations, which includes both secured and unsecured debts, and sets a three-to-five-year reorganized monthly repayment plan. The total amount for repayment is equal to the accumulated value of your nonexempt assets.
Those who fail to qualify for Chapter 7 because of their incomes may find the debt relief they’re hoping for through Chapter 13. It’s also a good option for people who want to catch up on missed car payments or mortgage obligations without giving up or selling any of their assets.
Should You File for Bankruptcy?
Both Chapter 7 and Chapter 13 present debtors with very appealing options to recover from their current financial crisis. Chapter 13 offers an immediate and near-guaranteed debt relief, while Chapter 13 provides a more favorable repayment option to avoid foreclosure.
However, declaring bankruptcy is not without consequences. Whether you choose to file for Chapter 7 or Chapter 13, you’ll experience a considerable decline in your credit score, which should affect your ability to qualify for loans.
Bankruptcy cases can be complicated and overwhelming. That said, you should strongly consider consulting with a reputable bankruptcy attorney before bringing your case to court. This will help you ascertain the soundness of your decision and determine which type of bankruptcy program is right for your specific situation.
Filing for bankruptcy is a big financial decision. Having someone who’s not only knowledgeable in the ins and outs of bankruptcy law but is also experienced in handling these cases will give you a better shot at receiving the debt relief you need.
About The Author
Sam Mazella is the Marketing Director of The Peterson Law Firm, the go-to practice in Arizona when facing divorce, child custody, child support and financial crisis. On his spare time, he enjoys cooking and doing camping trips with his family and friends.