Do I File For Chapter 7 or Chapter 13 Bankruptcy?

By  //  August 3, 2023

When you’re struggling to keep up with your debts and are unable to manage your finances, filing for bankruptcy may seem like a suitable option. Nevertheless, it’s a major legal decision that can significantly affect your finances for the foreseeable future.

Once you decide to file for bankruptcy, you’ll need to decide whether to file for Chapter 7 or Chapter 13, speak with an expert bankruptcy lawyer at AttorneyDebtFighters to learn more. Let’s discuss what bankruptcy is and a few key areas where the types of bankruptcies differ. 

What Does Bankruptcy Do?

When you have more debts than you can repay, bankruptcy is a way to reduce some of them and lessen the load. However, it should only be a last resort when you’ve explored all other options to manage your debts.

Chapter 7: Liquidation

Chapter 7 bankruptcy involves liquidation, in which you sell all or some of your assets to pay off your debts. Most people who choose this type have a limited income and no property.

Chapter 13: Reorganization

In Chapter 13, you reorganize your debts, which allows you to keep secured assets such as your home and vehicle. The court will provide a repayment plan to pay off your debts over the next three to five years.

Eligibility Rules For Bankruptcy

Your income should be low enough to pass the means test to qualify for Chapter 7 bankruptcy. There are two steps involved in the means test. The first step examines whether your income falls below the Chapter 7 limit, depending on where you file the petition. If your income for the last six months is below the median, you pass the test and are eligible for Chapter 7.

However, if you don’t pass the first step, you move on to the second. In this step, you document how much of your income goes towards food, mortgage payments, and other essential expenses. If you prove that your disposable income is insufficient to pay back your debts, you can file for Chapter 7 bankruptcy.

In the case of Chapter 13, you can’t have more than $1,257,850 of secured debt and $419,275 of unsecured debt. If you’re unsure whether you’re eligible, consult a bankruptcy lawyer at AttorneyDebtFighters.

Discharging Unsecured Debts

You’re probably wondering which debts you’ll need to repay with different types of bankruptcies. It depends on the type of debt you have. In Chapter 7 and Chapter 13, your unsecured debts will be discharged. These debts aren’t backed by collateral, such as credit card and medical debt, so you don’t have to pay them.

In Chapter 7, your unsecured debts are eliminated upon getting approval from the bankruptcy court. This can take a few months.

On the other hand, Chapter 13 will require you to make payments for these debts during your repayment plan. These debts are then discharged at the end of your repayment plan.

Managing Special Unsecured Debts

Some debts, such as student loans, child support, and income taxes, aren’t discharged by bankruptcy. If you file for Chapter 7, you’ll need to pay them after finalizing your bankruptcy proceedings. This shouldn’t be a problem if the remaining debt is smaller, and discharging other unsecured debts makes it easier to manage.

In Chapter 13 bankruptcy, you can pay these special unsecured debts over the course of your three-to-five-year repayment plan. This usually gives you more control over how much you pay each month, as it’s based on your affordability. And in the case of some debts, like income taxes, you can avoid penalties and interest, allowing you to pay less. It also protects you from unsecured creditors during the process.

Managing Secured Debts

There are certain debts that neither Chapter 7 nor Chapter 13 can eliminate, such as:

  • Car loan
  • Student loan
  • Mortgage
  • Child support
  • Tax debts

If you’re looking for some relaxation in these areas, here’s how Chapter 7 and Chapter 13 differ.

Chapter 7

If you file for Chapter 7, you can discharge secured debts like a mortgage or auto loan, but it requires you to give up the property. However, the decision is up to you whether you’d like to keep or surrender the collateral. So, if you think that you can no longer afford to make payments for your mortgage or auto loan, you can give up the collateral and discharge the remaining debt. This usually happens when the outstanding balance amount is very high.

The other option is to keep your car and home while continuing to make payments. But keep in mind that if you’re falling behind on these payments, you’ll have little time to catch up.

Chapter 13

If you have any arrears on your mortgage or auto loan, you can stretch them over the course of your three-to-five-year repayment plan. With Chapter 13, there’s a possibility to reduce some secured loans, making it easier to repay them. With a ‘cramdown,’ the court-approved repayment plan decreases how much you owe on these debts. One example is to reduce the balance on your auto loan by citing the car’s depreciated value.

The Effect of Bankruptcy On Your Credit

At the time of declaring bankruptcy, it’s likely that your credit score won’t be in the best shape. Missed payments and a high outstanding balance can take a toll on your credit. Even so, having ф bankruptcy on your credit report can significantly affect your creditworthiness and score for as long as it stays on your report. Your credit report will mention a Chapter 7 bankruptcy for up to 10 years and a Chapter 13 bankruptcy for up to 7 years.

Applying For Bankruptcy

Although you can file a petition for bankruptcy on your own, it’s better to have legal help during the process. A bankruptcy attorney has the experience and knowledge to navigate the complex legal process. Moreover, they can guide you on the best way to move forward as you file for bankruptcy.