Choosing Your Bankruptcy: Chapter 13 Versus Chapter 7

Debating the merits of the two main types of personal bankruptcy today? When you start researching, it can get a little confusing because there is such a deluge of information about bankruptcy on the Internet. The information below breaks the differences between the two types of bankruptcy down in a simple way. If all you want is a straight answer to the "chapter 7 or chapter 13?" question, keep reading.

Chapter 7: Total Debt Discharge

Chapter 7 bankruptcy completely discharges all of the debt you have. If you want to have all debts forgiven, this is the type of bankruptcy that can do that most effectively. There are, however, a few debts that can't be included in a chapter 7 bankruptcy:

  • Past due child support
  • Student loans
  • Tax debt

All of your other debt, for example credit card debt, can be discharged. You usually get to keep most or all of your assets in a chapter 7 bankruptcy. Each state allows a specific amount of bankruptcy exemptions. The exemptions refer to major property that you are allowed to keep. Standard exemptions include:

  • Homestead exemption: This refers to your primary home. You are allowed to keep up to a certain amount of equity in your home. For example, in the state of Illinois the homestead exemption is $15,000. As long as your current home equity equals that amount or less, you can enter into a reaffirmation agreement with your mortgage provider, promising to make all remaining payments when due.
  • Vehicle exemption: This refers to your main vehicle. You can keep one vehicle in which you have equity equal to or less than the exemption amount set by your state. If you still owe money on the vehicle, you must sign a reaffirmation agreement with the financing institution, promising to pay it off on time.
  • "Anything" exemption: This exemption can be applied to any property that you own. For example, you can apply it to jewelry and household furnishings. If you prefer, you can stack it with your homestead or vehicle exemption to allow you to retain more equity in those things.

Who Should File Chapter 7? Bottom line: Chapter 7 is a good choice for people with a small amount of assets and a lot of debt. If you have just one home, one vehicle, and average amount of household belongings, you stand a good chance of retaining everything you own while still getting all your debt discharged.

However, if you have a lot of assets along with a lot of debt, a Chapter 7 bankruptcy trustee will seize and sell the property that didn't fit within the allowable exemptions. The proceeds from this sale will then be used to pay down debt.

Chapter 13: A Repayment Plan

Chapter 13 bankruptcy is very different than chapter 7 because it doesn't allow for the discharge of debt. Instead, chapter 13 filers enter into repayment agreements that set new terms for the payment of debt. Although chapter 13 is not a debt discharge, it is still a way to get some debt relief.

If you are so far into debt that you can't catch up on payments, the new agreements can forgive some of the penalties and interest. This allows you to bring your accounts current and retain all your property.

Perhaps the main question that people ask a chapter 13 bankruptcy attorney is, "Why do a repayment plan if I can discharge all my debt with chapter 7?" This can be different for each person, but the main benefit is property retention. If you own significant assets and you don't want to part with them, Chapter 13 allows you to keep everything.

For example, if you have three vehicles and you want to keep all of them, only chapter 13 will allow you to do so, while chapter 7 would force you to relinquish two of them. If you own two homes, chapter 13 allows you to keep both, while chapter 7 would force you to sell the second home.

Who Should File Chapter 13? If you have a lot of property that you've worked hard for, and you want to keep all of it, this might be the best bankruptcy option for you. If you have too much equity in your property to meet with the chapter 7 bankruptcy exemptions for your state, chapter 13 may be the logical choice.

If you still aren't sure whether chapter 7 or chapter 13 is right for you, it is best to speak with a chapter 13 and chapter 7 bankruptcy attorney in your area. Your choice may be more clear-cut than you thought. To learn more or ask other questions, try contacting a company like Wagner Law Office PC.