You know you probably need to file for bankruptcy, but the whole process seems confusing and intimidating — especially when you’re trying to decide whether Chapter 7 or Chapter 13 is right for your situation.
Learning a little more about the differences between the two can help ease your mind and provide a stronger sense of direction.
Chapter 7 is often called “total” bankruptcy, while Chapter 13 is a “reorganization” bankruptcy.
What this means is that when you file for Chapter 7 protection, you are essentially asserting that you don’t have the spare funds to repay any of your debts. Thus, you petition the court to forgive most or all of them in one fell swoop. The process is generally over in a few months.
When you file for Chapter 13, you ask the court to take control of your debts, reorganize how they are paid and give you the chance to pay off what you can over the next three-to-five-year period . At the end of that period, the majority of your remaining debts are discharged.
For most people, there’s no downside to choosing Chapter 7 if you pass the state-specific “means” test that shows your income is low enough to qualify. Debtors who file Chapter 7 are technically required to liquidate excess assets and use the funds to repay their creditors, but the majority of people who qualify for this option don’t have any excess assets in the first place. Besides, there are exemptions in place that can protect much of what you do have.
If you don’t meet the means test, you can still file for Chapter 13, and it may even be preferable if you are behind on critical payments — like your home mortgage. Since Chapter 13 is designed to help you get back on your feet, it is often possible to negotiate a way to keep your home out of foreclosure.
Ultimately, you don’t have to make your bankruptcy decisions on your own. Working with an experienced legal advocate can give you the guidance you need during this difficult time.