Chapter 7 and Chapter 13 Bankruptcy--Which is Right for You?

The two most common bankruptcy filings are Chapter 7 and Chapter 13. Filing under each Chapter has its own advantages and disadvantages, but the choice will be determined by your own financial situation. This column covers the key elements of Chapter 7 and 13 bankruptcy and will help you determine which one is right for you.

Chapter 7 Bankruptcy

This is the classic elimination of debt and is most popular because of its correlation with having a "fresh start". In a Chapter 7 filing, all debts except obligatory debts are forgiven. Compared to a Chapter 13 filing, this filing is much simpler and faster--often over as soon as 3 to 6 months.

Eligibility and Means Test

Due to the nature of a Chapter 7 bankruptcy, your income and assets are subjected to a "means test." This test evaluates your eligibility for a Chapter 7 filing and is meant to filter out those capable of repaying at least part of their debt and prevent abuse of the bankruptcy system. So before considering a Chapter 7 filing, contact a bankruptcy attorney to first see if you qualify according to the means test standards.

Highlights of Filing a Chapter 7 Bankruptcy

Chapter 7 involves surrendering assets to satisfy creditors, so a Chapter 7 filing is best for those who have no means of repaying their debts and do not have significant ownership in property. Especially if most of your debt is comprised of credit card debt, liquidation may be the best option--this will give you the second chance you are looking for. However, those with significant obligatory debts such as income taxes, child support, or student loans must remember that these debts will still remain after a Chapter 7 filing. In addition, if you own valuable property, keep in mind that a Chapter 7 filing carries the risk of liquidation of such property.

Chapter 13 Bankruptcy

A Chapter 13 filing is considered a debt repayment or reorganization plan. In this filing, your bankruptcy attorney will work out a debt repayment plan that usually takes three to five years. Individuals who have significant assets will favor a Chapter 13 as they can keep all their property, exempt and non-exempt, so long as they are able to afford these repayment plans. Although debts are not completely eliminated, a Chapter 13 filing allows for certain debts to be reduced to an agreed amount.

Highlights of Filing a Chapter 13 Bankruptcy

Filing a Chapter 13 bankruptcy is a long-term solution to your bankruptcy problems. As mentioned, a debt repayment plan is created after calculating your "disposable" income. The key thing to remember about this calculation is that it will be very different from your perception of your disposable income. That being said, it is important that you contact your bankruptcy attorney to get a grasp of how much your repayment plan would cost over the next three to five years. Although a Chapter 13 filing will reduce the risk of losing your property and assets, you will be living with a significantly reduced income as you pay off your old debts.

There is no easy choice, but these are some of the key elements you should keep in mind when deciding to file for bankruptcy. Remember, filing for bankruptcy is not a quick fix--no matter which chapter you file under. With this in mind, you can avoid repeating financial mistakes and be one step closer to living debt free.

About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.