People often don’t realize that there are more than one choice when filing bankruptcy. The two most common types are Chapters 7 and 13. Briefly, Chapter 7 is what most people think of when they think of bankruptcy. It gives you relief from most debts (child support, alimony, other domestic support obligations; student loans; and most taxes are excluded). It’s relatively quick, about four months from start to finish. Usually, you get to keep all your property. But see here for what you might lose. In Chapter 13 you make payments to the Chapter 13 trustee for anywhere between three and five years (shorter if you can pay all your creditors in full in less time). So which is better?
Most people want Chapter 7. Who wants to make payments for up to five years? You want Chapter 7 if
- Your income is below the median income in your state for a family of your size
- You don’t have a co-debtor who isn’t filing that you want to protect
- You don’t have substantial equity in a house, car or any assets that the trustee in Chapter 7 might sell
- You don’t need time to catch up past due payments on cars, houses or other assets that might be foreclosed or repossessed
Conversely, if any of the above situations apply, for example you are above the median income or you need to catch up on past due mortgage payments, then you are looking at Chapter 13.
Sometimes people think they have to file Chapter 13 but upon looking at their situation, it turns out they can file Chapter 7. One example is they believe they have to file Chapter 13 to keep the car they owe $19,000 on and that is only worth $12,000. It’s true that if they file Chapter 7 they will either have to pay for the car or give it up, but once they look at the debt to value ratio, they realize that they are better off filing Chapter 7 and surrendering the car.
Choosing which chapter in bankruptcy is best for you can be complicated. There are lots of things to consider. Before you make the decision, it’s best to talk with an experience bankruptcy attorney to understand your options and what each might mean for you. If you have bankruptcy questions, please contact us.