There are two main types of bankruptcy that individuals choose when considering filing: Chapter 13 and Chapter 7. There are some major differences between these two types of bankruptcy that need to be understood before deciding which one is best for you.
What is Bankruptcy?
Bankruptcy occurs when an individual can no longer make payments on their debts after they have paid for their living expenses. Sometimes this happens for unforeseen reasons, like the loss of a job, or unexpected medical expenses. Other times, it happens because a person takes on too much debt without realizing they won’t be able to keep up with the payments. Whatever the path, it can be intimidating to come to the realization that bankruptcy may be the only answer. If that is you, don’t worry. The goal of the bankruptcy process is much less scary than it may seem.
Ultimately, the goal of declaring bankruptcy is to get help getting back on top of your debt, and creating a clean slate to build a more stable financial future. There are a few different ways that can happen, and they occur in different forms of bankruptcy. There are two types of bankruptcy that are most common for individuals in the US: Chapter 7 and Chapter 13. This article will walk you through the differences of each type, and help you figure out if Chapter 13 may be a better option for you.
What are the Differences Between Chapter 13 and Chapter 7 Bankruptcy?
The goal of both types of bankruptcy is the same as mentioned above. It aims to get you out of debt and back to a place of financial stability so that you can rebuild your future well. The two forms of bankruptcy accomplish this in different ways.
Chapter 7 Bankruptcy
We will start with a quick overview of Chapter 7 bankruptcy. Chapter 7 bankruptcy is often called ‘liquidation bankruptcy.’ The name is appropriate because that is exactly what you will be doing. When you file for Chapter 7 bankruptcy, the court will appoint a bank trustee over your non-exempt assets. Depending on their cost and what you owe on them, you may be able to keep your house and your car, along with your smaller possessions.
However, the bank trustee will liquidate excessive things like second and third cars, secondary properties, and more to pay back your creditors. The process is relatively quick, and at the end of the process, the court has the potential to forgive most of your debt. There is debt that the court cannot forgive in both Chapter 7 and Chapter 13 bankruptcy. This includes any alimony you owe, child support, and government debts. Other than these things, you can typically have some, if not all, of your debt forgiven.
Chapter 7 bankruptcy is more designed for people who are fully unable to continue making any payments on the debts that they owe. Alternatively, if you still have some disposable income at the end of every month, Chapter 13 bankruptcy may be better suited for you.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy works by figuring out a new way to pay off your debts. When you file for Chapter 13 bankruptcy, a bank trustee reviews your financial situation in full. You will also have to submit a proposed repayment schedule that lays out how you plan to or can afford to pay off your remaining debt. When you are in Chapter 13 bankruptcy, you commit to putting every disposable dollar towards your debt. Disposable income is the amount of money you have leftover each month after paying for your necessary living expenses. Though the entire process can take 3-5 years, there are many benefits to choosing Chapter 13 bankruptcy over Chapter 7.
Reasons You May Choose Chapter 13 Bankruptcy
You Can Keep Your Assets:
If you were to file for Chapter 7 bankruptcy, you would have to submit all of your assets over to the bank trustee. Once you have done this, the trustee gets to decide what happens with the assets. If it is valuable enough to sell, they will do so to help pay off your debt. Even if it isn’t, there is a chance you would have to ‘purchase’ the asset back from the trustee. With Chapter 13 bankruptcy, the bank trustee does not have the power to liquidate your assets to pay down your debt. Instead, they simply facilitate and enforce the creation and fulfillment of your new debt payoff schedule.
You Are Not Eligible For Chapter 7 Bankruptcy:
There are some pretty stringent requirements and qualifications when it comes to filing for bankruptcy. Oftentimes, there is a chance that you do not qualify for Chapter 7 bankruptcy. This can occur for several reasons, but, whatever the case may be, you may still be eligible for Chapter 13 bankruptcy.
Protect Your Codebtor:
When you file for bankruptcy, the court places you under an automatic stay, which means your creditors can no longer pursue you for the debts that you owe. While this is terrific news for you, it may mean trouble if you have a codebtor. A codebtor is someone who owes a debt alongside you for various reasons. A couple of examples of a codebtor include someone who has cosigned a loan for you or a spouse who is not filing for bankruptcy alongside you. In Chapter 7 bankruptcy, your codebtor is not protected under the automatic stay. This means that the creditors may stop pursuing you, but they will start pursuing them. If you want to protect that from happening, then consider filing for a Chapter 13 bankruptcy. There is a specific ‘codebtor automatic stay’ that applies. This prevents creditors from pursuing your codebtors for payment.
Pay Debt Out Over Time:
If you are able to make some payments on your debts, just not full payments, then Chapter 13 may be best for you. The goal of Chapter 13 bankruptcy is to spread out your payments over an extended period of time so that you can make your payments every month.
Other Alternatives to Consider
If you are considering filing for bankruptcy, but both Chapter 7 and Chapter 13 bankruptcy sound too drastic for your situation, there are bankruptcy alternatives you can look into and see if they would be helpful. Here are just a few options:
Debt Consolidation
Debt Settlement
Financial Counseling
Debt Management Plan
Looking into these options could save you from having to file for bankruptcy to begin with.
