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- Choosing the Right Type
There are advantages and disadvantages to both Chapter 7 and Chapter 13. Some of them are compared and contrasted here:
-Advantages of Chapter 7: Most people opt for Chapter 7 because it is simpler and results in a complete discharge of debts. Cases are handles relatively quickly; most are closed within three to six months. At the end, with the exception of mortgages, car payments, and non-dischargeable debts, such as alimony, child support, and recent taxes, the one-time debtor is debt free. While property could be lost in a Chapter 7 case, often it is not. This is because bankruptcy allows the debtor to retain necessities. If the debtor files for bankruptcy with little to lose, then he or she will most likely be able to keep everything. The exception to this is if items are pledged as collateral for debt.
-Disadvantages of Chapter 7: Not everyone can apply for Chapter 7. The new bankruptcy law instituted stricter requirements for Chapter 7, including a “means test.” Therefore, if 1) the debtor has an average income over the preceding six months that is greater than the median income a comparable person in the same state or 2) the debtor has adequate income, after deducting necessary expenses and required debts (child support, taxes, secured debts, etc), then he or she will not be allowed to file for Chapter 7. It should also be noted that if a debtor has received a discharge for Chapter 7 within the previous 8 years or a discharge for Chapter 13 within the previous six years, then he or she cannot file for Chapter 7. Furthermore, Chapter 7 can result in the loss of property, or of the debtor’s home, if the equity on it exceeds the exemption in his or her state.
-Advantages of Chapter 13: While debtors shy away from Chapter 13, because it requires the repayment of a portion of debts, there are many good reasons to choose it (aside from the fact that not everyone is eligible for Chapter 7). 1) If you are behind on your mortgage or car payments and want to make these up so as to reinstate your original agreement, you can do this in your Chapter 13 repayment plan; there is nothing comparable to this in Chapter 7. 2) If many of your debts cannot be discharged under Chapter 7 (student loans, tax obligations, etc), you can include them in your repayment plan and deal with them over a more manageable period of time. 3) You wish to repay your debts, but in order to do so you need the protection of bankruptcy court. 4) If you have property that would not be exempt that you wish to keep, then you should file for Chapter 13 as it would be lost in Chapter 7. 5) If you have a cosigner on a debt and wish to protect that person from creditors, then you should file for Chapter 13. Under Chapter 7, the creditors will pursue the co-debtor for the payments you owe.
-Disadvantages of Chapter 13: While Chapter 7 frees the debtor from all debts, Chapter 13 requires the debtor to repay some portion of the debt over the course of a three or five year plan. Furthermore, most people who file for Chapter 13 are not able to complete their plan; if they change from Chapter 13 to Chapter 7, then all the money that was paid into the Chapter 13 repayment plan was for nothing, because the debts will be discharged anyway.