Chapter 7 and Chapter 13 are the two most common types of bankruptcy filed each year in the United States. Neither is objectively better than the other because each chapter has its own advantages and drawbacks, affecting every filer in different ways.
Several factors, however, may help you identify which chapter will maximize your benefits and minimize your losses. Here are 6 things to consider when choosing between Chapters 7 and 13.
1. The Value of Your Assets
If you have several high-value assets, you may benefit more from Chapter 13 because you would lose property through the Chapter 7 liquidation process.
On the other hand, you may only own a used vehicle and a few other possessions you need to live a normal life. This situation would most likely be a “no-asset” case, which means you could file Chapter 7 and obtain a debt discharge without losing any property.
2. State Exemption Laws
Choosing between Chapter 7 and Chapter 13 may come down to whether you’ll be able to protect your assets during the Chapter 7 liquidation process. To protect assets from liquidation, you will use either state or federal exemption laws, although some states will not allow you to choose federal exemptions. Each state differs in the types of assets you can claim and the levels of equity you can keep from each asset. If you cannot keep what you need, you may benefit more from Chapter 13.
3. The Type of Debt You Owe
Only unsecured debt (e.g. credit card debt, personal loans, medical bills, etc.) is dischargeable through bankruptcy. If most of the debt you owe is secured (e.g. mortgages, vehicle loans, student loans, taxes, child support, etc.), Chapter 7 will not be very useful to you.
Chapter 13, on the other hand, allows debtors to catch up on past-due payments for secured debt during their 3-5-year repayment plan. Because of the automatic stay (i.e. the court order halting all debt collection activities), Chapter 13 can be highly effective for people wanting to rescue their homes from foreclosure.
4. Your Income
Even if you are eligible for Chapter 7, you might be considering Chapter 13 because you want to save your assets from liquidation. However, Chapter 13 will only be a viable solution to your financial crisis if you have the means to make monthly payments for 3-5 years. If you complete this plan, you may benefit from a debt discharge, but completing all required payments will take diligence and thorough planning.
5. Your Current Credit Score
If you have decent credit, Chapter 13 may be a better option than Chapter 7. All forms of bankruptcy can negatively impact a filer’s credit score, but Chapter 13 tends to do less damage than Chapter 7. It also stays on the filer’s credit report for 7 years, while Chapter 7 cases remain on the report for 10.
If, on the other hand, your credit is already severely damaged, Chapter 7 can free you from burdensome debt and provide the clean slate you need to rebuild your score. Some filers even see their score increase after filing Chapter 7 because the debt discharge substantially lowered their overall credit usage.
6. Your Goals
Are you hoping to obtain a fresh start sooner rather than later? In many cases, Chapter 7 can eliminate vast portions of debt within 6 months. Are you hoping instead to restructure your debt, giving yourself a few years to adjust your finances and catch up on past-due payments without losing what’s most important? In that case, Chapter 13 may be a better fit. Sole proprietors can accomplish their long-term entrepreneurial goals through Chapter 13 as well, using it to protect their company’s assets while reducing both personal and business debts.
Ultimately, the bankruptcy process will affect every filer differently, depending on the above factors. Both chapters can be powerful forms of debt relief, but choosing between them can be one of the most pivotal decisions you make.
Come to the Law Office of Seni Popat for Skilled Guidance
If you’ve decided to file bankruptcy, our team at the Law Office of Seni Popat can thoroughly assess your financial crisis to determine which type of bankruptcy is the right fit for you. We can then guide you through the process from beginning to end, advocating for your best interests and avoiding issues before they arise.