While there are several types of bankruptcy, the most common ways to file bankruptcy for individuals are Chapter 7 and Chapter 13. Each type has its own guidelines and benefits and consumers will need to carefully choose which type is the best option for their needs. The following overview shares basic information about both Chapter 7 and Chapter 13 bankruptcies.
Chapter 7
Also known as a common bankruptcy, a Chapter 7 is an option for both businesses and individuals. A trustee is appointed and all nonexempt assets are sold. Nonexempt assets are ones that are allowed by law to be sold such as family heirlooms, expensive musical equipment, a second home or vehicle and other valuable items. It is possible to keep some of your nonexempt property, but each state has its own guidelines, so you will need to check your state laws on the procedure for keeping those items.
With a Chapter 7, once your property has been sold, the trustee will arrange payment to your creditors. They will no longer be allowed to contact you and when the money is gone, all remaining debts are cancelled. This means you are not responsible for any more payments to your creditors.
However, even if you file bankruptcy, there are certain items you will still have to pay for. These will not be discharged from your responsibility. Examples of debt you will still be responsible for include child support, alimony, criminal fines or restitution you have been ordered by a court to pay, taxes that you owe that are less than three years old, student loans and any debts you have because you committed fraud.
There are many reasons to choose a Chapter 7 bankruptcy over a Chapter 13. If you have no hope of ever being able to pay back the money you owe, Chapter 7 is the best option for you. Another reason is if you are being sued by creditors for their money or your debts have no co-signers. By filing a Chapter 7, you will also protect some property and income from being sold to pay your debts.
Chapter 13
A Chapter 13 bankruptcy basically sets up a repayment plan so you will be able to pay your debts over a course of 3 – 5 years. This is a reorganization loan that will help you pay off 10-100% of your debt. The amount you will have to repay is based on how much you owe, what kind of debt you have (credit cards, mortgages, etc.) and how much you earn.
As with a Chapter 7 bankruptcy, there is some debt that you cannot include in your debt. Student loans, criminal fines, child support and alimony will all have to be repaid by you. These types of debt are rarely included in any type of settlement proceedings.
You should choose to file for a Chapter 13 bankruptcy if you can realistically pay back your debts in 3 – 5 years and want to pay what you owe. By filing for a Chapter 13, collection proceedings will stop and your creditors will be informed of your payment plan. If you have any debt that has co-signers, you may have to choose a Chapter 13. Also, by choosing to file this type of bankruptcy, you will protect assets you have from being sold.
There are stricter income guidelines with a Chapter 7 filing, so you may have no choice but to file for a Chapter 13. If you have filed for Chapter 7 in the last six years, or want to leave that choice open for the future, you will want to choose a Chapter 13.
Remember that every state has its own laws about bankruptcy. Some states will allow you to keep more of your personal property than others and the income guidelines are different. Be sure to research the laws of your state when making the decision of which type of bankruptcy is the best option for you.
