How To Decide Between Chapter 7 and Chapter 13 Bankruptcy

Facing financial difficulties can be overwhelming, and deciding to file for bankruptcy is typically a last resort for individuals seeking relief from insurmountable debt. However, the decision to file for bankruptcy is only the first step. The next critical choice is determining which type of bankruptcy is most suitable: Chapter 7 or Chapter 13.  

Both options offer distinct advantages and disadvantages, and the right choice depends on an individual’s financial situation, assets, income, and long-term goals. Hence, understanding the differences between these two bankruptcy forms is essential to making an informed decision. 

Read on to learn more.  

Understanding Chapter 7 Bankruptcy 

Chapter 7 Bankruptcy, often referred to as “liquidation bankruptcy,” is designed for individuals with limited monthly income who can’t repay their debts. This form of bankruptcy involves liquidating non-exempt assets as payments to creditors. However, many assets, such as household goods, clothing, and retirement accounts, are typically protected under state or federal exemption laws.  

One of the primary advantages of Chapter 7 is that it typically allows for a faster discharge of debts, often within three to six months. This makes it an attractive option for those seeking a fresh start without the burden of overwhelming debt. 

For more detailed information on the specifics of Chapter 7 Bankruptcy, individuals can refer to resources on Chapter 7 Bankruptcy. These resources can provide a comprehensive comparison of Chapter 7 and Chapter 13, helping them understand which bankruptcy process aligns with their financial circumstances. 

Understanding Chapter 13 Bankruptcy 

Chapter 13 Bankruptcy, or “reorganization bankruptcy,” is tailored for individuals with a regular income who wish to repay their debts over time. Unlike Chapter 7, Chapter 13 doesn’t involve the liquidation of assets. Instead, it allows debtors to create a repayment plan that spans three to five years.  

During this period, individuals can make monthly payments to a bankruptcy trustee, who then distributes the funds to unsecured and secured creditors. This type of bankruptcy is particularly beneficial for those who have fallen behind on mortgage or car payments and want to avoid foreclosure or repossession. 

Key Factors to Consider When Choosing Between Chapter 7 and Chapter 13 

Choosing between Chapter 7 and Chapter 13 bankruptcy requires careful consideration of key factors. These include:  

Income Level and Stability 

One of the most significant factors in deciding between Chapter 7 and Chapter 13 is the debtor’s income. Chapter 7 is typically suited for individuals with low income or those who don’t have the means to repay their outstanding debts.  

To qualify for Chapter 7, individuals must go through the “means test,” which is designed to compare their income to the median income in the state they’re residing. If their income is too high, they may be required to file for Chapter 13 instead. On the other hand, Chapter 13 is ideal for individuals with a steady income who can commit to a bankruptcy repayment plan. 

Asset Protection 

Another critical consideration is the value of the debtor’s assets. Chapter 7 may require the liquidation of non-exempt assets, including valuable property, investments, or luxury items. However, many states offer exemptions that protect essential assets such as primary residence, vehicle, and personal belongings.  

In contrast, Chapter 13 allows individuals to retain their assets while repaying creditors through a structured plan. This makes Chapter 13 preferable for those with significant non-exempt assets they wish to keep. 

Types of Debt 

The nature of the debt also plays a role in determining the appropriate bankruptcy chapter. Chapter 7 effectively discharges unsecured debts, such as credit card debt, medical bills, and personal loans. However, it doesn’t eliminate certain obligations, such as student loans, child support, or tax debts.  

Chapter 13, conversely, can help individuals catch up on secured debts, such as mortgage or car payments, and may provide a way to discharge some types of non-dischargeable debts through the repayment plan. 

Long-Term Financial Goals 

Individuals should also consider their long-term financial objectives when choosing between Chapter 7 and Chapter 13. Chapter 7 offers a quicker resolution, allowing debtors to rebuild their credit sooner. However, it may have a more significant impact on credit scores in the short term.  

Chapter 13, while requiring a longer commitment, demonstrates a debtor’s effort to repay their obligations, which can be viewed more favorably by secured and unsecured creditors and may have a less severe impact on credit scores over time. 

The Role of Legal Counsel in Making the Decision 

Navigating the complexities of bankruptcy law can be challenging, and seeking professional legal advice is highly recommended. An experienced bankruptcy attorney can evaluate an individual’s financial situation, explain the implications of each chapter, and guide them through the bankruptcy filing process. Legal counsel can also help ensure that all necessary documentation is completed accurately and submitted on time, reducing the risk of complications or delays. 

Final Thoughts 

Deciding between Chapter 7 and Chapter 13 Bankruptcy is a significant decision that requires careful consideration of various factors, including income, assets, types of debt, and long-term financial goals. Chapter 7 offers a quicker discharge of debts but may involve liquidating non-exempt assets. Chapter 13, while requiring a longer commitment, allows individuals to retain their assets and repay creditors through a structured payment plan.  

By considering the information presented above, individuals can make an informed choice that best suits their financial needs and paves the way for a more stable financial future.