The majority of bankruptcies filed in the United States take one of two forms: Chapter 7 and Chapter 13. Some people will be able to choose whether a Chapter 7 or Chapter 13 bankruptcy is right for them, while others may be forced to choose one over the other based on their income and the type of debt they have incurred.
Should You File for Chapter 7 or Chapter 13 Bankruptcy?
Chapter 7 is the more basic form of bankruptcy, and is designed for individual filers to discharge unsecured debts quickly. In Chapter 7, a debtor can discharge credit card debt and past medical charges within three to five months after filing for bankruptcy. However, the debtor must have very little income and be willing to liquidate (sell) any nonexempt property and assets in order to pay back some of the debt. If the debtor only has one home, one car, very few assets, and little income, Chapter 7 bankruptcy may be a good solution.
If a debtor makes too much money or otherwise does not qualify for Chapter 7 bankruptcy, he or she may still file for Chapter 13 bankruptcy, which offers:
- Ability to pay back debts. Chapter 13 bankruptcy is a restructuring form of bankruptcy, which reorganizes debts and requires a structured payment plan. In exchange, debtors can pay back a portion of their debts while retaining all of their property and assets. Debtors with regular income can use Chapter 13 bankruptcy to make monthly payments to catch up on missed car or house payments, usually without added interest or penalties. Debt is usually discharged in three to five years, once all planned payments have been made.
- Protection from home foreclosure. Once a debtor files for Chapter 13 bankruptcy, an automatic stay will be issued to temporarily prevent foreclosure proceedings. Once the court has reviewed and accepted a debtor’s repayment plan, the debtor cannot face foreclosure as long as he or she makes all scheduled payments and adheres to the terms and conditions of the plan.
- Freedom from specialized debts. Some kinds of debt are dischargeable under a Chapter 13 bankruptcy that are not available for relief under a Chapter 7 bankruptcy. For instance, debts incurred as a result of housing fees (such as a homeowners' association, condominium, or co-operative), court fees, and certain kinds of marital debt.
- Protection for co-debtors. Chapter 13 bankruptcy provides protection for people who share debt jointly. As long as payments for a joint debt are made to the creditor, co-debtors will be shielded from liability until after the repayment plan is complete.