Individuals and families who are unable to pay their debts typically use the file for one of two types: chapter 7 and chapter 13. Let’s break down some of the characteristics, pros, and cons of these bankruptcy options.
Filing for chapter 7 bankruptcy – or a liquidation bankruptcy – is a somewhat faster and more aggressive option of clearing debt than most, as a typical chapter 7 bankruptcy case takes only a few of months to complete. In a chapter 7 bankruptcy filing, debts are cleared without the necessity for a repayment plan, which could take years to complete. Though it is a very common method of filing but could result in the permanent loss of property. A significant nonexempt property could be sold through a bankruptcy trustee in order to repay debts, though some who file will retain their property in full, and none of an individual’s property that is listed as exempt will be sold. If an individual cannot get current on their mortgage, a chapter 7 filing can only temporarily stop a foreclosure and will not protect their assets long-term.
It is also possible that you may not qualify for chapter 7 bankruptcy. Whereas chapter 13 is available to everyone, chapter 7 filings are limited only to those whose income falls below the median household income for their area. Those whose disposable income exceeds certain limits – sans expenses and debt payments – will not be able to file for chapter 7 bankruptcy. This is called the “means test” and can get somewhat confusing as definitions of disposable income can vary, but we are here to help.
If you are unable to file for chapter 7 bankruptcy, chapter 13 bankruptcy may be the better option for you regardless. A chapter 13 bankruptcy works not through liquidation but through steady repayment of debts. This repayment process can take several years, typically 3-5, depending on the extent of what is owed. Anyone can qualify for chapter 13, but it is a less popular option in the United States because it requires a payment plan.
However, there are situations when chapter 13 may be the right option. As mentioned earlier, chapter 7 does not stop a foreclosure, so if you need a place to live while working out your debts, filing for chapter 13 bankruptcy will keep your home from being seized through the concept of automatic stay. Automatic stay ceases all contact between you and those who wish to collect from you, usually through the entire duration of your case. Chapter 13 bankruptcy may also be the better option if there is a nonexempt property that you don’t want to have sold back to creditors, especially if you can afford to pay the value of your assets.
Finally, if you have a co-signer on your debts, chapter 13 bankruptcy will protect them from being contacted and collected on via the automatic stay principle. A chapter 7 bankruptcy will not necessarily prevent this. However, keep in mind that an automatic stay can be lifted in the event that the debtor does not keep current on their repayment plan. If they fall behind, a creditor can order that the stay is lifted, and courts will often honor this.
To break it down: if you are employed and hold a significant amount of equity/property, it is likely that chapter 13 is your best option, as you will presumably be able to keep up with your repayment plan and retain what you hold ownership over. If you are unemployed and hold few assets or a home that no longer holds great monetary value relative to what is owed on it, a chapter 7 bankruptcy is likely the best option for you as it is much faster and simpler. A “no asset” bankruptcy is among the most common in the United States and can prove to be a very efficient process.
No matter which option you choose, capable bankruptcy attorneys at Vaknin & Agai Law are here to give you the advice and support you need through the entire bankruptcy process. Let us help you take the first steps to a fresh start in your life.