Deciding Between Chapter 7 and Chapter 13 Bankruptcy

Choosing the type of bankruptcy is a very critical step in the filing process. Each type of bankruptcy entails different filing procedures and leads to different end results.  To get started on the bankruptcy process and to know where you are headed, you will need to decide between Chapter 7 and Chapter 13. In this article, you will find several questions to ask yourself to help make your decision as straightforward as possible.

What is the difference between Chapter 7 and Chapter 13?

The very first thing to understand about choosing your type of bankruptcy is the difference between Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, the bankruptcy court simply discharges some amount of your debts based on your proven inability to repay them. In exchange, your property and assets can be repossessed by a court trustee and sold for money, which is then distributed to creditors. A Chapter 13 bankruptcy, on the other hand, involves the bankruptcy court restructuring your debts. The bankruptcy court sets a repayment plan that will cover all or some of your debts, depending on the type of debts you have and your income. At the end of the repayment plan, your remaining debts are discharged.

Am I eligible?

For many consumers, the decision between Chapter 7 and Chapter 13 is predetermined.  To file for bankruptcy, a person must meet the eligibility requirements, without exception. Consumers often find themselves eligible for one or the other, Chapter 7 or Chapter 13, but not both. These consumers are left without much of a choice – either they must file the type of bankruptcy they qualify for, or not file at all. If you fall in this category, the choice has been made for you. If you meet the eligibility requirement for both Chapter 7 and Chapter 13, however, you can decide. Your decision will likely need to consider the property and assets you own as well as the amount of debt you need to clear. Eligibility requirements for Chapter 7 and requirements for Chapter 13.

What will happen to my property?

The treatment of property is very different between Chapter 7 and Chapter 13 bankruptcy. In Chapter 7, the court has a legal right to assume control of non-exempt property and sell it to pay back creditors. Non-exempt property can include family heirlooms, certain motor vehicles, cash and savings, investments, and in some cases, homes. For someone who has substantial non-exempt property to lose, this can be a significant downside of Chapter 7. In Chapter 13, the court does not have the right to take property from you, other than a portion of your income.

How much debt will I have to repay?

In most cases, neither Chapter 7 nor Chapter 13 will completely clear your debts. Only certain debts fall under the coverage of bankruptcy, and the court does not always discharge debts in full. As a result, it is important to consider how much debt you will end up repaying after you file bankruptcy. In Chapter 7, a complete filing usually ends with a full discharge for all debts except non-dischargeable debts (government taxes, court fees, student loans). Those non-dischargeable debts would need to be repaid. In Chapter 13, more debts are dischargeable, but discharges can only take place after a significant repayment plan has been followed. Depending on the type and amount of debt you owe, one type of bankruptcy will likely involve less repayment than the other.

What else?

There are a few other considerations about each type of bankruptcy that should weigh into your decision. For one, Chapter 7 usually takes a lot less time than Chapter 13. This means less stress and a faster track to your “clean slate.” Chapter 13 provides the advantage of repaying back your debts – meaning you can honor your original promise to creditors, with some help from the court.