Deciding whether or not to file for bankruptcy is never easy. If you have exhausted all other options and feel like you are drowning in debt and unable to make ends meet, bankruptcy may be a way to end the vicious cycle.

Once you’ve made the decision to file for bankruptcy, it is important to understand which option is best for you. Chapter 7 and Chapter 13 Bankruptcy are the most common solutions for individuals. Understanding the difference between the two is important to determine which is the right approach for your circumstances.

What is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy can be used by both individuals and businesses. This type of bankruptcy has income guidelines and is sometimes called “liquidation bankruptcy”, though in the vast majority of cases there is nothing liquidated.  This is determined by a review of your assets and their value against the amounts the Bankruptcy Code will allow you to protect.  The major benefit under Chapter 7 is that most unsecured debts, like medical bills, personal loans, payday loans and credit cards, are eliminated without any additional payments to creditors.

Upon the filing of the Chapter 7, an automatic stay order is entered, and any collection activity must cease, giving you room to breathe.   A Chapter 7 case lasts approximately three to four months, and then if there is no objection, a discharge of the debt is entered. One of the biggest downsides of filing a Chapter 7 bankruptcy is that it will remain on a credit report for up to 10 years and can potentially lower credit scores making it harder to buy a home or purchase a car without having a higher-than-normal interest rate.

What is Chapter 13 Bankruptcy?

Unlike Chapter 7, Chapter 13 is only an option for individuals, or individuals doing business as sole proprietors versus as a separate business entity. This type of bankruptcy reorganizes your debt into a repayment plan, including secured debts like home mortgage arrears or car payments, as well as priority debts like past due income taxes, while also eliminating your unsecured debt. Chapter 13 Bankruptcy is typically for people that are in a situation where they have enough income to pay back some of their debt but may not be able to pay under the original terms.

Debtors typically choose to file a Chapter 13 Bankruptcy due to some advantages over filing Chapter 7. Chapter 13 does not require assets valued above the limitations in the Bankruptcy Code to be sold to pay back creditors and may also allow debtors to modify certain secured debts like home equity mortgages and vehicles not worth their value, or at a high interest rate, in certain scenarios. The repayment plan is based on the individual’s situation, such as income, current expenses and the type of the debt being repaid. Ultimately, one payment is disbursed among the various creditors. The repayment plan is usually set up for three to five years until all the debt has been repaid. The bankruptcy will not be discharged until the repayment plan is complete.

Similar to Chapter 7, an automatic stay also occurs upon the filing of a Chapter 13 case, and can stop foreclosure sales, repossession or tax sale, as well as incessant calls from creditors.

Similar to Chapter 7, Chapter 13 can also impact credit scores. However, because of the commitment to a repayment plan under Chapter 13, some creditors view it more favorably than a Chapter 7 where the debt is wiped out. Chapter 13 Bankruptcy can remain on a credit report for up to 7 years.

When to Hire an Attorney

Everyone’s situation is different and what may have been the right choice for an acquaintance or family member may not be the best option for your circumstances. This is why it is always best to hire an experienced bankruptcy attorney to assist you in deciding which path truly meets your needs.

If you’re feeling overwhelmed by debt, reach out to the team at Mette, Evans & Woodside for compassionate & experienced guidance.

Author: Tracy Updike, Esq.

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