Many people have reservations about bankruptcy. It is not always looked at favorably, but in some cases, it can be a person’s only choice.
So, when a person does decide to file for bankruptcy, they want to choose the right one. Chapter 7 and Chapter 13 are the main types of bankruptcy for consumers. Which is better for you? Here’s what you need to know.
Why Choose Chapter 7?
Chapter 7 bankruptcy is a good option for those who have a lot of debt but very few assets. It happens pretty quickly — within several months. Most debts will get wiped out, and no payment plan is required. However, this part is not necessarily easy. Chapter 7 is also known as liquidation bankruptcy because you may have to sell some of your assets to repay debts. Once this is done, you will likely be relieved of your debts completely.
Chapter 7 bankruptcy is not available to everyone, though. It requires a means test to check your income. You need to have an income low enough to pass two financial tests. Also, Chapter 7 is not a good option for those who are facing foreclosure or repossession and want to keep their assets. It also cannot wipe out student loans, tax debts, or child support.
Why Choose Chapter 13?
If you do not pass the Chapter 7 means test, then you can still opt for the Chapter 13 one. Chapter 13 is a good option if your income is too high or you have property, such as a house or a car, that you want to keep.
With Chapter 13 bankruptcy, your debts are not wiped out. Instead, you make payments and hold onto your property by working on a payment plan that lasts three to five years. Chapter 13 bankruptcy allows you to catch up on missed payments over time and keep property associated with secured debt.
Chapter 13 offers a powerful benefit if your residential home is worth less than you owe. Chapter 13’s “lien stripping” mechanism lets you remove a “wholly unsecured lien” from your home. A wholly unsecured lien would be a junior loan that would not receive a penny if you were to sell your house.
Chapter 13 offers what is called an automatic stay. This is an order that stops creditors from garnishing your wages and taking money out of your paycheck. It also prevents bank account levies, foreclosure on a home, and repossession on your car.
Why a Bankruptcy Lawyer is Crucial for Your Financial Recovery
The right bankruptcy for you will depend on your individual situation. Many people prefer Chapter 7 because it is quick and easy, but it does not always solve all your problems. A good bankruptcy attorney can assess your financial situation and give you the advice you need as well as handle all the legal aspects of the filing. Since bankruptcy impacts your finances for a long time, it is the wisest decision you can make.
