Sometimes paying debts can be overwhelming especially if you’re a low-income earner or you’re not making enough money to cover your monthly expenses. If you’re unable to handle such debts, the next best thing might be to file a bankruptcy claim which will give you time to get back on your feet and rebuild your financial status. This could sometimes mean forfeiting some of your property, however, what you lose and what you get to keep depends on the type of bankruptcy you file for. Note that filing for bankruptcy is a critical decision with long-term financial consequences. You should only take this step as a last resort.
Chapter 7 and Chapter 13 are two types of individual bankruptcy filings and this article will help you understand the difference between them.
Chapter 7 or straight bankruptcy is the most common type of bankruptcy filed by individuals. This type of bankruptcy can save you from a lot of debt and help you build yourself financially. If you file for Chapter 7, you can discharge most of your unsecured debts and few secured debts by surrendering your property. Unsecured debts refer to debts or loans that are not covered by collateral including credit cards, medical bills and personal loans.
Chapter 7 is mostly filed by individuals, however, certain businesses including partnership, corporations, and LLCs with assets that be converted to cash or cash equivalents can file for Chapter 7. To cover your debt, your assets will be sold and converted to cash. You can exclude some assets from sale depending on your bankruptcy case.
Immediately you file for Chapter 7 bankruptcy, all debt-collection actions against you will be stopped. This is known as an automatic stay order. This stops creditors from demanding payment whether by calling you, emailing you, writing you a letter, or filing a lawsuit against you. If your creditors continue to send you messages or remind you about your debt, you can report them to your attorney who will get a contempt of court action filed against them. If your creditors go ahead to collect what you owe, they may be fined by the court or made to pay damages.
Chapter 13 is another type of bankruptcy mostly used by individuals. It is the second-most common type of bankruptcy. With this type of bankruptcy, you can pay back your loan without having to liquidate your assets. Chapter 13 will dissolve your debt and debt terms by creating a repayment plan according to your current financial status to help you repay your debt within three to five years.
Depending on your repayment plan, you will have to make monthly debt payments to a court trustee, who will then distribute the money to your creditors. At the end of the plan, any remaining debt will be discharged.
Just as with Chapter 7, you will be granted an automatic stay order when you file for Chapter 13 bankruptcy. This stops most collection actions, so your creditors won’t be able to seek wage garnishments, file lawsuits, or demand payment from you. This order will also protect your co-debtor(s) and save your property from being repossessed. Note that you must continue with mortgage payment or you may lose your home to foreclosure.
Chapter 13 works best if you are faced with secured debts and have some money to pay back some of the debts. With this form of bankruptcy, you can work out a new plan to pay your creditors without losing your property.
Differences Between Chapter 7 and Chapter 13 Bankruptcy
Chapter 7 and Chapter 13 bear some similarities, but they are very different. Filing for Chapter 7 means you’re likely to lose your property and have your assets sold off to repay your debts. However, the advantage is that you will also be discharged from your unsecured debts.
With Chapter 13, things are different. If you have many secured debts or debts that can’t be discharged such as domestic support obligations (child support), unpaid income taxes, or student loans, then Chapter 13 makes for the best option. The difference is that you won’t have to sell off your assets to pay back your debts in a Chapter 13 bankruptcy. Rather, you will be given a better repayment plan according to your current financial status.
Is It Better to File Chapter 7 or Chapter 13?
Chapter 7 is more common because it is the most affordable. If you own little or no property, or you have an income that won’t meet up with your debt payment, or your debt profile consists of mostly unsecured debt such as personal loans, credit card loans, and medical bills, then Chapter 7 is the best option for you. However, you will lose most or all of your assets when you file for this form of bankruptcy. But you can actually exempt some of your valuable property from the liquidation process. At the end of your bankruptcy case, you will be discharged from most of your unsecured debts and some secured debts.
If you want to keep your property or you have mostly secured debt, and you can commit to a repayment plan for three to five years, then Chapter 13 is the right option for you. Chapter 13 bankruptcy will help you save your home from foreclosure and help you repay your debt at your own pace. Instead of selling off your property, you will be able to create a new repayment plan that will help you pay off your debt within three to five years. This type of bankruptcy is best if you have an income level that can cover your debts within the repayment period.
Bankruptcy is usually a tough decision to make. However, filing for the right bankruptcy can help you get back on your feet if you are deep in debt. With your attorney, you can decide which type of bankruptcy is best for you and which would help you build up your financial life back up.