Which Bankruptcy Chapter Is Best For Me?

Most people who file bankruptcy opt to file chapter 7 or chapter 13. Chapter 11 is a debt restructuring similar to chapter 13 that's for businesses and for individuals with larger debts. Chapter 11 is more expensive, so if chapter 13 is an available option, it's usually a better choice.

Which chapter you should file depends on your situation and your goals.

Chapter 7 is known as a liquidation bankruptcy, although in practice most clients do not have any assets liquidated. In chapter 7, there is no repayment plan, and the case trustee will liquidate any unexempt assets with the proceeds going to your creditors. If there are no assets to liquidate, the case may take as little as a few months, unless other issues come up. At the end of the case, you will receive a discharge order which is a permanent discharge for your debts. Some debts, like taxes, student loans and child support are not discharged, but credit cards, medical bills and repossession and foreclosure deficiencies are discharged.

There are some limitations on what a chapter 7 case can do for you. If you are behind on your mortgage, and want to keep your home, a chapter 7 filing is typically not going to be much help. Another large distinction is that in a chapter 13 filing, you may be able to "strip off" liens from your home, depending on the home value and the amounts owed. Your ability to do this in chapter 7 is much more limited.

While chapter 7 is usually quick and relatively simple, it is not available to everyone.

If you earn too much money, chapter 7 may not be an option for you. To determine this, the court will look at your income for the six months prior to filing your case, and compare your income to the income of the median household of the same size. If you earn more than the median, the presumption is that you should have some money left over to repay your creditors, and this would be done through a chapter 13 repayment plan.

In chapter 13, you propose a payment plan for your creditors. The term of the plan ranges from 36 to 60 months. The length and payment amount of your plan will be unique to your situation. A very common use of a chapter 13 payment plan is to bring a delinquent mortgage current over time. During the course of the plan, you make the normal mortgage payment plus a bit extra, and at the end of the case the loan will be current. A chapter 13 bankruptcy filing may also be used to "strip off" second mortgages when the value of your home is less than the amount owed on your first mortgage. When the case is completed, the second mortgage is gone forever.

Depending on your income, a chapter 13 plan may pay some of the debts that would be settled by a chapter 7 filing. What you pay could range from pennies on the dollar to a full repayment, based on your income and expenses. When the case completes, any of these debts that are not paid through your plan are discharged. Even if you end up repaying all of your debts, chapter 13 can restructure your payments so you have more money available each month. Filing the case will also stop the interest from accruing on your high-rate debts, which is another huge benefit.

Deciding which bankruptcy chapter to file is something you should do with your attorney. Your situation and your ultimate goal will drive the decision, so you should discuss these with your attorney at your first opportunity.

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