Through years of practice, I have lost track of how many times I am asked the question, “What is the difference between Chapter 13 bankruptcy and Chapter 7 bankruptcy, and what is the best option for me?” Every time that I am asked that question, I give the same response. Chapter 13 bankruptcy is a repayment plan, while Chapter 7 is a liquidation bankruptcy. Interestingly enough, every client knows that such a simple answer must carry with it certain complexities. They are right! It is not always that simple.
Choosing Between Chapter 7 and Chapter 13
When determining the best bankruptcy option, rarely does it come down to the amount of debt that a person has. Rather, it more often comes down to the type of debt that it is, a person’s income, or whether that person has assets. While many people may find it more convenient to file a Chapter 7 bankruptcy because the commitment time is considerably less, they do not always consider the fact that some of their property may be at risk, or that certain debts may not be discharged in their Chapter 7 bankruptcy. Thus choice between Chapter 13 and Chapter 7 must be made with a long-term view.
Reasons for Filing Under Chapter 13
There are four main reasons that someone would consider a Chapter 13 bankruptcy over a Chapter 7 bankruptcy. First, if you have filed a Chapter 7 bankruptcy within the last eight years, you cannot file another Chapter 7 bankruptcy. Second, if you exceed the median household income level in the state where you reside, you may be ineligible to file a Chapter 7 bankruptcy. Third, if you are behind on a vehicle, or home mortgage, but would like to try and keep that property, you may want to consider a Chapter 13 bankruptcy. Last, if your debt consists of that which would not be dischargeable in a Chapter 7 bankruptcy (i.e. certain tax debt and child support), you may want to consider a Chapter 13 bankruptcy to repay this debt through a Chapter 13 bankruptcy plan.
Reasons to Consider Chapter 7
Incidentally, you may want to consider a Chapter 7 bankruptcy if: you have never filed bankruptcy; your household income is less than the median household income level in the state where you reside; you do not own any property; or your debt is primarily unsecured debt (i.e. credit cards, medical bills, old utility bills, vehicle repossessions, etc.) and can be discharged in a Chapter 7 bankruptcy.