If you have decided to file for bankruptcy, it is important to understand the different types. Both Chapter 7 bankruptcy and Chapter 13 bankruptcy offer unique benefits.
Which is useful for you depends on your situation, including but not limited to the amount you have, your income and the value of your assets.
What’s the difference between chapter 7 and chapter 13 bankruptcy?
Anyone can submit a petition for bankruptcy (your “petition”) for bankruptcy in chapter 7 or chapter 13. However, the court does not have to accept your petition if the liquidator decides that you must apply for another form of bankruptcy or if you are not eligible to file for bankruptcy.
It is quite common for people who submit a petition for Chapter 7 to go to Chapter 13 instead. This usually happens if you do not achieve the payment, or if you have sufficient income to pay off at least part of your debt. In this case, the court requires that you claim for Chapter 13 and at least try to repay your debts.
But if you don’t have a lot of income or assets in your hands, it is much easier (and cheaper) to submit Chapter 7, since the majority of your debt will be wiped out. That said, people who have trumps to protect will want to file a file for Chapter 13 to be forced to sell those assets.
Annually, about twice as many people submit chapter 7 as chapter 13. At https://bankruptcy-basics.org/ we discuss in detail for chapter 7 as chapter 13 bankruptcy lawyers.
When should you use Chapter 7 Bankruptcy?
1. If you have very little income or assets.
By filing Chapter 7 for bankruptcy, the court may take and sell part of your valuables, assets or savings (jointly known as Cotherijk as assets) to pay your creditors. That said, most people who are eligible to submit for Chapter 7 do not really have many assets and therefore have little or nothing to pay their creditors. As a result, their debts are forgiven without any attempt at repayment.
Moreover, because their income is so low, there is not enough money to prepare a debt payment plan, which means that they cannot be pushed into Chapter 13 bankruptcy. Statistics show that the majority of people who declare Chapter 7 bankruptcy have no significant income and 85% have no assets that can be sold by the court.
2. If your debts are too high to pay.
If you have an extremely large amount of debt (perhaps due to high medical bills), you may have exhausted all your resources to pay it and you probably have not enough income to make a payment plan for Chapter 13. In this case, Chapter 7 may be the only way for you to get out of a huge amount of debt and move on with your life.
When to use Chapter 13 bankruptcy
1. If you have assets that you want to protect.
In Chapter 13 bankruptcy, the court will not sell any of your assets because you use the current income to pay off your debts. So if you own a home that you want to keep or if you have other items that you don’t want to sell, Chapter 13 is probably a better choice. However, you do need a good income that is reasonably stable to draw up a debt payment plan. The money that remains after deduction of your living expenses and covered debt payments is then used to pay your other creditors.
But one requirement for Chapter 13 is that your payment plan pay back at least as much debt as if your assets were sold. For example, if you have a valuable collection of art, you probably cannot declare and keep Chapter 13 bankrupt. This is because under Chapter 7 your collection would be sold and your creditors would be reimbursed.
2. If you have a regular income and have paid debts.
Chapter 13 bankruptcy allows you to prepare a payment plan where your debts are paid in accordance with what you can afford according to your income. Moreover, you do not have to worry about interest rates going up or being hit with extra penalties or costs. At the end of the payment plan you pay as much as you can during a payment period of three or five years, and the rest of your debts will be canceled – ideally without having to sacrifice any assets.
Proclaiming bankruptcy is a very big step and it is important to make sure that you choose the right type of bankruptcy, as this will greatly affect the coming years of your life. Before you go bankrupt, you must undergo credit guidance. This can be a useful forum to answer your questions and to get advice.
There are also certain debts, such as alimony, child benefit and student loans, that cannot be forgiven, regardless of the type of bankruptcy you file. Use the information above to help you decide which type of bankruptcy is right for you, read more on the US court’s bankruptcy website and consult a lawyer if you have more detailed or state-specific questions.