If you are considering bankruptcy, you may want to compare Chapter 7 with Chapter 13. Both have advantages, but one may be better suited for your circumstances. What are the main differences between the two?
The faster option
Not everyone is eligible to file a Chapter 7 bankruptcy, also known as the debt liquidation option. First, you must pass the means test, which involves meeting a median family income level. Your attorney can help you organize your debts and expenses to prepare for this test. If you have little or no disposable income after paying for daily living necessities and taxes, Chapter 7 may be a good choice. This kind of bankruptcy protection allows you to discharge debts and stop collection activities, but you will likely have to give up certain assets to do so. On the other hand, it is not uncommon to complete a Chapter 7 filing in 100 days or fewer.
Income considerations for Chapter 13
If you cannot pass the means test and are not eligible to file Chapter 7, the next option is Chapter 13. In fact, depending on your income level, you may have to file Chapter 13. One advantage here is that you will not need to give up any assets. This form of bankruptcy requires that you set up a payment plan to discharge your debts, a plan that will usually run for three to five years. With Chapter 13, you can consolidate your debts and make one monthly payment. However, if your income fluctuates, making consistent monthly payment could be difficult. If unable to make your Chapter 13 payments, your plan could convert to a Chapter 7. The judge could also dismiss your case altogether.
If you file a Chapter 7 bankruptcy, it will be part of your credit report for up to 10 years. Chapter 13 will remain on your credit report for up to seven years.
Some creditors regard a Chapter 13 filing in the most favorable light because it shows you are paying your debts, but is this the right way for you to go? When comparing Chapter 13 to Chapter 7, only you can decide which form is better suited to your needs. Turn to a legal professional for advice.