Chapter 7 or Chapter 13 Bankruptcy

Once you have decided to file bankruptcy, it is very important to file the chapter that is best for your situation.  There are several factors which you need to consider with your bankruptcy lawyer when choosing which type to file such as the types of indebtedness owed, vehicle payments, equity in property, and your household income.

The first thing to consider are the secured debts that you owe. A secured debt is one in which you used the loan to purchase something, such as a vehicle, home, or furniture.  A requirement for filing Chapter 7 is that you must be current on your secured debt payments in order keep the underlying property securing it.  If you are behind on mortgage or vehicle payments, and want to keep your property, then it may be better for you to file a Chapter 13 and put your missed payments in the repayment plan rather than lose your property.

Another aspect of secured debt is your monthly payment on vehicles.  In a Chapter 7, you will have to keep paying the payment that you originally agreed to pay when you got your loan if you want to keep your vehicle  A Chapter 13 has flexibility to possibly lower your monthly payment by reducing the interest rate.  The interest rate reduction will save you a lot of money over the five years, and you will get your title at the end of the term.  This is also true for title pawns on your vehicles as well.

The second thing to consider is how much equity you have in your real or personal property.  Equity is the value of the property that is above the amount you owe.  If you have vehicles that are paid off or have land or a house with a lot of equity, a trustee in Chapter 7 can sometimes take your property and sell it to pay your debts.  There are bankruptcy exemptions you can use to protect your equity, but if you have equity you cannot protect then there is a danger of losing the property in Chapter 7. Instead of losing your property, you can file a Chapter 13 and set up a payment plan and keep all of your property.

The types of debts you have will make a difference in which chapter that you need to file.  Most unsecured debts are dischargeable (wiped out), such as credit cards, medical bills, and personal loans.  However, there are certain debts that you cannot get rid of in bankruptcy, such as some income taxes, student loans, and child support arrears.  If you file a Chapter 7, you will still owe these debts even after your case is completed.  A Chapter 13 will allow you to pay your past-due taxes so that you can be debt free after five years.  A Chapter 13 is especially important for payment of back child support because you can pay the arrearage amount and then request from the state court that the interest on the arrearage be waived.

If you don’t have any equity in property, not very much household income, and a lot of unsecured debt, then a Chapter 7 would be a good fit. You can get rid of your unsecured debt quickly and easily.  You will have to pay your bankruptcy attorney fees and costs up front, unlike in Chapter 13 where the costs and fees are included in the five year payment plan. However, your case will be completed in about three to four months in Chapter 7 versus five years on the Chapter 13.