Should I File A Chapter 7 or Chapter 13?

Most bankruptcies filed in the United States are either under Chapter 7 or Chapter 13. The kind that you file depends on a few criteria, including your income, assets, debts, and your financial goals.

Here is a quick thumbnail of the differences between Chapter 7 and Chapter 13 bankruptcies.

Chapter 7 is a liquidation bankruptcy designed to discharge your general unsecured debts such as credit cards and medical bills. Filing for Chapter 7 requires that you have little or no disposable income, and few assets. There is an income limit for Chapter 7 filers, and those in excess of that limit may turn to Chapter 13 bankruptcy.

A trustee is appointed to administer your case when you file for Chapter 7. S/he will review your bankruptcy petition and other documentation. The trustee’s role is also to sell your nonexempt property to pay back your creditors. If you don’t have any nonexempt assets, you keep everything and your creditors receive nothing. Most Chapter 7 cases result in no distribution to creditors.

It is critical to carefully evaluate the value of assets before choosing a bankruptcy chapter. Because if a debtor has excess equity in her home and files a Chapter 7 petition, the trustee is likely to seek to sell the house, which is usually unwanted by the debtor.

Chapter 13 is a wage earner repayment bankruptcy. Filers need to show that they earn enough to resume their regular secured debt payments, as well as their usual monthly expenses, and a percentage of their unsecured debt. Many people choose to file for Chapter 13 bankruptcy because it offers many benefits that Chapter 7 bankruptcy does not, such as the ability to modify mortgages, to catch up on missed mortgage payments, or strip wholly unsecured junior liens from their homes.

In Chapter 13 bankruptcy, you are allowed to keep all of your assets. In turn, you must pay back all or a portion of your debts through a repayment plan. The amount to be paid through the plan depends on your income, expenses, and types of debt. Typically, Chapter 13 bankruptcy is for debtors who can afford to make monthly payments to catch up on missed mortgage, rent or car payments and/or pay off nondischargeable debts such as taxes and child support arrears.

If you have any other questions about choosing between Chapter 7 and Chapter 13, please give us a call.

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