Bankruptcy – Chapter 7 Vs. Chapter 13

On Behalf of Steele Law Firm PLLC | Apr 6, 2017 | Blog

Millions of hardworking Americans experience financial difficulties every year. Perhaps it’s a loss of a job or maybe credit card debt gets out of control, and then suddenly you are on a downward financial spiral. Filing for personal bankruptcy may be hard to accept, but it is truly a viable solution that will bring an end to harassing phone calls, letters from creditors or even people showing up at your home.

The most common choices for individuals under the U.S. Bankruptcy Code are Chapter 7 and Chapter 13. Both provide protection, but there are major differences. Below is a quick reference guide to see if one of these could provide financial relief for you:

Chapter 7

Often known as liquidation, this type bankruptcy is where debts are partially paid by selling off some of the debtor’s assets. It allows you to walk away from most of your non-exempt debt. If your income is below the median amount for the size of your household, then you can file for Chapter 7. For example, this is applicable if there is very little money left after paying monthly expenses or you don’t have enough money to pay the bills.

Pros:

• Debts are discharged (eliminated).
• The process only takes about 3-6 months.
• It allows you to keep most of your non-luxury possessions.
• It enables you to get a new line of credit after 3 years.
• You can keep your paycheck.

Cons:

• It remains on your credit record for 10 years.
• Non-exempt property will be liquidated.
• You will still need to pay alimony and child support, student loans and your mortgage.
• You can only do this every 8 years.
• There isn’t long-term protection against foreclosure on your home.

Chapter 13

This is generally for people in higher income brackets. Chapter 13 is a reorganization of your debt with the goal of paying it back in 3-5 years. The rule of thumb is that some creditors will be paid back at least a percentage of the debt, some with interest.

Pros:

• You are allowed to pay back your debt.
• You get to keep anything you are able to make payments on.
• Terms of the payments to creditors are variable.
• It is a better option than lawsuits, repossession or defaults.
• Can protect your vehicle from repossession.
• Protects homes from foreclosure.
• Allows many to get caught up on child support/alimony, student loans and tax debt.
• You can do this repeatedly.

Cons:

• You must have a job with certain level of income to file for Chapter 13.
• The 5-year payment plan can be a long time for some.
• Any money not spent on food, shelter and medical care goes towards the debt.

If you are considering filing for bankruptcy, the smart first step is to speak with a bankruptcy attorney. They have the experience and the knowledge to offer solutions that you may not be aware of. They can also help you to figure which type of bankruptcy is best for your financial situation under the bankruptcy laws here in Texas.