Depending on your financial situation, filing for bankruptcy can be a wise move. But what you should do can depend on what kinds of debt you owe and which assets you own. In some cases, Chapter 7 is the way to go, while in others, you might need the extra tools available through Chapter 13 to get a fresh start.
The main difference between Chapter 7 and Chapter 13 bankruptcy is that Chapter 7 looks at all of your assets, protects the ones that are deemed exempt and then liquidates any other non-exempt property to pay creditors. This process usually takes less than six months. In contrast, Chapter 13 is a repayment plan that typically lasts three to five years. To qualify for Chapter 13, you must pass something called the “means test,” which is designed to determine if your income is low enough to meet your debt obligations.
Both chapters can discharge certain debts, such as credit card bills and medical debts, and both can give you a fresh start when it comes to debt payments. However, there are some debts that don’t disappear in bankruptcy, such as recent income taxes and child or spousal support. In addition, if you file for bankruptcy and are behind on your mortgage or car loan, that will still be your responsibility even after the case has concluded.
If you’re not sure whether Chapter 7 or Chapter 13 is the right option for you, a qualified bankruptcy attorney can help. A lawyer can explain the benefits and downsides of each to help you decide what path is best for your unique situation.
Generally, debts that you have secured with collateral, such as your home or car, are best dealt with through Chapter 13. This is because Chapter 7 can force the sale of those assets and then use the proceeds to pay creditors. The court will also liquidate your other assets if necessary to ensure that your debts are paid.
If, however, you’re already behind on your secured debt and you want to keep the asset, then you might need to file for Chapter 13. A bankruptcy lawyer can work with you to come up with a plan to catch up on your debt while also discharging other unsecured debts.
Occasionally, the court might dismiss or convert your Chapter 7 case to Chapter 13 even though it would have been better to finish the Chapter 7. These are called “induced conversions,” and they often happen when you owe back taxes (especially recent ones) or if you fail the means test. If you’re not careful, this could mean that you lose all the protections of Chapter 7 and are left with no bankruptcy options at all. That’s why it’s so important to talk with your bankruptcy attorney about both of these scenarios before making any decisions. It may save you a lot of grief down the road.
