Chapter 7 bankruptcy vs. Chapter 13 bankruptcy

By: Darrell Castle

A lot of people wrongly assume that Chapter 7 bankruptcy is somehow inherently better than Chapter 13. After all, Chapter 7 has the advantage of clearing out your unsecured debt very quickly. Chapter 13 takes longer and reorganizes your debts rather than clearing them out entirely.

Sometimes clients will come to our office expecting to qualify for a Chapter 7; but after our conversation it’s clear their priorities and financial obligations would make Chapter 13 a better choice.

It’s true that Chapter 7 has a lot of advantages, if you’re qualified to do a Chapter 7 and if it meets your financial goals. But there are plenty of situations when you probably don’t want a Chapter 7, or when you might actually prefer a Chapter 13.

For example, let’s say you’re behind on your house payments. Under a Chapter 7, you most likely won’t be able to stay in your home in those circumstance; but under a Chapter 13 you can.

Or let’s say you have a certain amount of equity in your home – equity that exceeds the exemptions in your particular state. Chapter 13 will allow you to keep your home under those circumstances, but Chapter 7 will not.

And if you’re behind on your car payment and it’s about to be repossessed, Chapter 13 will allow you to keep your car; Chapter 7 will not.

Your income and expense situation might also factor into your decision. Under the 2005 bankruptcy laws, if you’re what’s called an “above-median debtor” (if you make more than the average income in your geographic area)you may have to meet special qualifying rules to file a Chapter 7.

Those are all factors for why you might need, and want, a Chapter 13.

So both options are powerful, useful mechanisms for getting a fresh start. Your priorities moving forward and your particular financial situation will help clarify which one is right for you.

Want to know more?

Contact me if you have questions about what kind of bankruptcy might help you the most.