The two types of bankruptcy most individuals use are Chapter 7 and Chapter 13. Choosing the best one for you depends on your financial goals, your income and the amount and type of debt you want to be discharged. There are several differences between the two.
Chapter 7
Overview: Chapter 7 is referred to as liquidation bankruptcy. It is available to individuals and business owners who do not have enough disposable income to pay their debts. If your income exceeds the qualifying amount, you may be able to file under Chapter 13.
Under Chapter 7, a trustee is appointed who evaluates your case. The trustee may take certain property and sell it in order to provide payments to your debtors. There are certain categories and amounts of property that you are allowed to keep that cannot be sold, which is referred to as exempt property.
Benfits: Most of your unsecured debt will be discharged. You will be ready for your fresh start in just a few months and you can begin rebuilding your life and your credit.
Drawbacks: Some debts are NOT dischargeable, so if these are the debts that are inspiring you to file for bankruptcy, Chapter 7 will not help you as much as you are hoping for. Nondischargeable debts include: Secured debts like mortgages and auto loans, some income taxes, spousal and child support, and student loans unless there is a showing of extreme hardship.
Chapter 13
Overview: This is reorganization bankruptcy. It for debtors who are behind in paying their debts.They want to save their assets, such as their home, and have enough disposable income to establish a repayment plan.
When you file your Chapter 13 bankruptcy petition, you present the court with a proposed repayment plan. The court will consider the type of debts you have, the property you own and your income. You will need to earn enough money to keep current on the secured loans you have as well as the payment arrangement made for the arrearages on other loans.
Benefits: You are allowed to lump all your back payments together and pay them over a period of time, usually three to five years. At the end of that time, if you have followed all the requirements and made all your payments, the debts that remain will be discharged.
Drawbacks: It takes three to five years to complete. Any missed payments may result in your case being dismissed with no debts being discharged and you will be back to square one.
Stephen Burton has served as an attorney for bankruptcy trustees, taught bankruptcy at the National Business Institute and practiced before the bankruptcy courts. He regularly attends continuing education classes. As a consequence, virtually every case he files is successful.