If you’ve decided you need to file for bankruptcy, you may wonder which option is better, Chapter 7 or Chapter 13. One option isn’t better than the other. In fact, both can be excellent options in certain situations. It all comes down to your personal situation and what you need out of your bankruptcy. In some cases, Chapter 7 may be the ideal solution, but in others, Chapter 13 may be better.
When Chapter 7 Is Better
Chapter 7 is the better option if you have very little disposable income. You’ll have to fill out specific information for what’s called the Means Test. If you pass, you can file Chapter 7. This test basically looks at how much money you have left over after paying all of your bills and all other necessities. If it’s very little, it means you simply have no money to pay other creditors.
Chapter 7 then allows the court to determine which debts are discharged so that you do not have to repay them. This can give you extra money to put towards your necessities and towards debts that cannot be discharged, such as child support, student loans, and certain types of taxes.
One of the downsides with Chapter 7 is that the court can order you to sell or give up assets that are determined to be non-essential as a way of paying back some of your debts.
When Chapter 13 Is Better
Chapter 13 doesn’t require you to pass the Means Test, but it also doesn’t remove your debts, either. Instead, it’s a way of restructuring your debt so that it’s easier to pay off. You may Chapter 13 bankruptcy does take longer than Chapter 7 to complete, but it doesn’t affect your credit as much, and your assets are protected. This is often one of the reasons some people look at Chapter 13 as the better option. It’s easier to come out of it with a stable credit history. Chapter 7 bankruptcies will remain on your credit for ten years, and some employers and lenders look upon them less favorably than Chapter 13 bankruptcies.
While your debt won’t be completely discharged, it will be restructured by the court. Your monthly payments will be consolidated into one lower payment that the court distributes to your debts. You may pay on these debts for as long as five years, but at the end, any remaining balances are discharged.
So which option is better for you? It depends on how much disposable income you have and what you want to get out of bankruptcy. Contact Michael F. Kanzer & Associates to talk about bankruptcy and learn which option might fit your needs better.