Should I File Chapter 7 Bankruptcy or Chapter 13 Bankruptcy?

person filing bankruptcy

The process to file a Chapter 7 bankruptcy is effortless, fairly quick and eliminates a large portion of unsecured debt; thus most consumers chose this procedure as opposed to a Chapter 13 bankruptcy. However, the Chapter 7 Bankruptcy has very specific requirements, and unfortunately, not all debtors qualify. Conversely, even if you as a debtor, are eligible for a Chapter 7 Bankruptcy, you may not enjoy the benefits of a Chapter 13 bankruptcy.

To assist you in this regard, our experts at highlight below various important aspects of both chapters for you to consider when determining which chapter is best suited for your situation:

Reasons to File a Chapter 13 Bankruptcy

In the following circumstances, it may be in your best interests to file a Chapter 13 Bankruptcy as opposed to a Chapter 7 Bankruptcy:

  1. You do not meet the requirements to file a Chapter 7 bankruptcy.

Currently, bankruptcy law requires a debtor to pass the “¨Means Test” in order to file a Chapter 7 Bankruptcy. The said test dictates that before filing bankruptcy, your average monthly income for the past six months must be less than or equal to the average median income for the state in which you reside. Accordingly, if your income exceeds the average median income for    your state; and if it is possible for you to repay a portion of your secured debt in a Chapter 13 payment plan, then you do not qualify for a Chapter 7 bankruptcy.

  1. You prefer to pay your debts.

If you are a person that wishes to exercise good faith and pay back your creditors, then you should opt for Chapter 13, as in terms of this Chapter you are required to make monthly payments towards your debt over 3-5 years.

  1. You want to prevent foreclosure on your home.

A foreclosure proceeding in many instances can be immediately stopped when a Chapter 13 Bankruptcy is filed. The Automatic Stay provision of    Chapter 13 will temporarily stop a foreclosure until a repayment plan is        devised. Upon confirmation of the said plan, the arrears owing on your mortgage bond will be repaid via the Chapter 13 Bankruptcy payment plan.

  1. You want to save your vehicle from repossession.

By filing a Chapter 13 Bankruptcy, you can prevent you vehicle from being   repossessed. Through a “cram down”, you may be able to reduce the amount   you owe on the loan, provided that you purchased your vehicle at least 2 years before filing bankruptcy. This is especially beneficial if the value of  your vehicle is less than the amount of the loan.

  1. You want to keep non-exempt property.

Amongst other pitfalls of Chapter 7, it does not allow a debtor to keep non-   exempt property, whereas Chapter 13 does. A debtor will in terms of Chapter 13 Bankruptcy, be permitted to keep non-exempt property, which property, the Trustee of a Chapter 7 Bankruptcy may have ceased.

  1. You owe debts that are non-dischargeable in a Chapter 7.

Various debts cannot be dealt with in terms of Chapter 7 bankruptcy, however these debts may qualify to be included in the Chapter 13 bankruptcy payment plan. These debts, inter alia, include:

6.1       court fees,

6.2       debts incurred to pay back non-dischargeable taxes,

6.3       fees from a homeowners association, condominium or a cooperative,

6.4       martial debts, excluding orders of support.

  1. You have a large amount of non-dischargeable debt that you would prefer to pay back over time.

While some debts such as student both chapters can deal with loans or certain tax debt, if you file a Chapter 13 bankruptcy, the debt can be paid off in the repayment plan.

  1. You want to protect your co-debtor.

If creditors receive payment through the Chapter 13 Bankruptcy payment plan, this will prevent creditors from going after your co-debtors. However, note that if there is a balance remaining on the debt after the payment plan has been fully implemented, the creditor may turn to your co-debtor to collect the outstanding amount. While a Chapter 7 Bankruptcy may terminate a debtor’s obligation to pay a debt, creditors may still proceed against co-debtors of the debtor for payment of the debt.

Reason to File a Chapter 7 Bankruptcy

While the issues with regards to Chapter 7 Bankruptcy have been highlighted above, the Chapter may be useful in the following circumstances:

  1. You are unable to make monthly payments toward a Chapter 13 bankruptcy payment plan.

In the unfortunate event that you are unable to repay your creditors within 3 to 5 years; and if you meet the requirements of Chapter 7, then the most feasible option will be for your to file a Chapter 7.

  1. Most of your debt is dischargeable.

Chapter 7 will liberate you from the obligation to repay your debts, if the majority of your debts fall under the category of dischargeable debt. Dischargeable debt, inter alia, include:

  • Credit card bills,
  • Medical bills,
  • Personal loans,
  • Certain taxes,
  • Utility bills.
  1. You need a quick relief from creditors.

As per point 2 above, if your debt falls under the category of dischargeable debt, then Chapter 7 will free you from the personal obligation of having to satisfy the debt.

Ultimately, the decision depends on which Chapter best suits your circumstances. The drawbacks and advantages of both the chapters have been discussed above. While Chapter 7 involves a quick and easy process, Chapter 13 may result in a more beneficial outcome. Whichever procedure you choose, provided that you qualify, the experts at trust that the information provided above will be of assistance to you.