If given an option, most people prefer to file for bankruptcy under chapter 7 as compared to chapter 13. This is because, chapter 7 helps discharge most unsecured debts like medical bills, credit card bills as well as personal loans.
Benefits of filing for bankruptcy under chapter 7
Also known as the liquidation bankruptcy, not everyone can qualify under this chapter. In order to qualify, you must pass the Means test (which is determined by calculating your income, which must be lower than the state median income). Moreover, even if you do qualify, to get your debts discharged, you have to give up valuable assets in value to the secured debts that you want to be discharged.
It is important to understand the benefits of filing under each chapter. For this, you can consult an experienced attorney who will guide you about the entire process in detail as well as help you select what is best for your case.
- You get a Frest Start – this is because you get rid of most of your debts helping you start a debt-free life. However, few debts remain like student loans, and domestic support obligations.
- There is no limitation on your debt amount – you can have as many debts, as there is no limit of debt mentioned for filing under chapter 7.
- No repayment plan – Unlike chapter 13, you do not have to continue to pay your debts. Once you get the discharge, you are free from all liability and no not need to pay after that.
- Debts are discharged as quickly as within 60-90 days.
The drawback of filing under chapter 13
- You can file only as an individual and not as a business – whether you are a sole proprietor or have a partnership firm, you can file for bankruptcy only as an individual and not as a business under chapter 13.
- Creditor dues are not discharged – you have to repay your creditors based on the court-approved repayment plan between 3-5 years.
- There is a limitation on debt – when you file for bankruptcy under chapter 13, you need to check the secured and unsecured debt limitation. This amount varies every year.
Circumstances when you should choose chapter 13 as compared to chapter 7
- When you do not pass the criterion set for Means Test
- You have disposable income which you can use to repay a part of your unsecured debt
- You want to protect your home from foreclosure or repossession
- You want to protect your car from repossession. Provided your car was purchased minimum 2 years before you file for bankruptcy
- You want to protect your non-exempt property
- You want to discharge debts that are only possible under chapter 13 and not chapter 7
- You have a non-dischargeable debt. You are willing to pay it off in installments over a period of 3-5 years