Comparing Chapter 7 and 13, which is right for you?
Updated: Mar 30, 2020
Everyone contemplating bankruptcy has to look
at this initial question.
For individuals who know little or nothing about the topic of bankruptcy, two initial areas must first be examined. Initially, a person must look at what they already have (ASSETS) and what type of debts (LIABILITIES) they owe. Looking at both of these areas is essential and necessary to make the correct choice between a Chapter 7 and a Chapter 13.
The above Bankruptcy chapters deal with two different types of outcomes and which is best for you depends on your unique individual situation.
Most people who file for Bankruptcy protection file a Chapter 7 (LIQUIDATION) Bankruptcy Petition. The rest usually go to a Chapter 13 REPAYMENT WAGE EARNER PLAN. There are times when an individual debtor chooses one Chapter and later has to change over to the other Chapter. The Bankruptcy Laws allow this when upon starting one Chapter, you discover that it would be more advantageous to use the other.
In a Chapter 7 Bankruptcy Petition, the debtor has to file the petition protecting everything they can. The issue of Exempt versus Non-Exempt assets comes into play here. The debtor has to use the law and the Exemptions he selects to try to protect their as many assets as possible. Under Chapter 7, there are ways to protect assets and the question boils down to basically which assets are the most important. If upon pursuing a Chapter 7, a debtor discovers he/she cannot protect the most important assets, then they can convert to a Chapter 13.
Chapter 13, on the other hand deals with not losing any assets. This chapter is for individuals who have significant assets they wish to protect. However, in order to select and successfully achieve a Bankruptcy discharge under Chapter 13, the debtor must be able to afford it. In other words, a Chapter 13 Plan looks at your income to see if you can afford it. First, does this debtor have a big enough income to pay their current payments on big items like their home or car while paying their back payments on those very same big items like the home or car. You see, Chapter 13 is used to catch up on your missed payments on items like a mortgage and a car and saving those assets from being taken back from the creditor. Not only must the debtor have a sufficient enough income to take care of current and arrears payments, they must also have enough to afford their normal living expenses. Sometimes, this financial demand for all the income needed is too much for the debtor and they fail to complete their Chapter 13 Bankruptcy Plan which typically lasts for 3 to 5 years. When this happens, the debtor has to either convert over to another Chapter or have their Petition (Case) dismissed.
If the debtor chooses a Chapter 13 Plan, part of the Petition process is to draw up a Chapter 13 Plan. In the Plan, the debtor must show that they can afford to pay everything required by the Plan. The Bankruptcy Trustee will evaluate the Chapter 13 Plan and see if it is acceptable. If it is, the Trustee will approve the plan and the debtor will be successful if they can make all the required payments for the length of the plan.
In conclusion, this brief analysis only covered the basics. For most debtors there are two Bankruptcy Chapters to consider. In the first (Chapter 7) the debtor protects as much as they can under the rules of this chapter. Whatever is not protected is taken by the Bankruptcy Trustee for liquidation and distribution of the proceeds recovered (minus expenses) to the creditors. In the alternative, for those who have a sufficient income to afford it, the Chapter 13 route allows the debtor to catch up with back payments while protecting their assets. Here, the debtor will not lose their assets, so a home can be saved from foreclosure and a car can be saved from repossession.
For those who are in a financial bind, a careful and realistic look at their situation is needed before undertaking any type of Bankruptcy. The best route is to talk to an attorney who can look at your situation and give an honest analysis. This guidance is critical. Although, technically a person can do their own Bankruptcy themselves, it is a complicated process best handled by a professional.