If you are considering bankruptcy, usually the two main options are Chapter 7 and Chapter 13 bankruptcy. There are pros and cons to each type, but in some situations Chapter 7 is the better choice. And in others, Chapter 7 is the only choice.
Read on to learn when Chapter 7 bankruptcy might be a better option than Chapter 13 bankruptcy.
(To learn when Chapter 13 might be better than Chapter 7, see When Is Chapter 13 Better than Chapter 7 Bankruptcy?.)
Chapter 7 vs. Chapter 13
While both are bankruptcy proceedings which should result in a discharge of your debt, Chapter 7 and Chapter 13 are quite different. Understanding their differences will help you determine if Chapter 7 is the better choice for you.
Chapter 7 Bankruptcy: An Overview
Chapter 7 is a liquidation. In exchange for a discharge of most or all of your debts, you must turn over nonexempt property to the bankruptcy trustee. The trustee sells the property and uses the proceeds to repay unsecured creditors. A routine Chapter 7 bankruptcy takes several months to complete.
In Chapter 7 bankruptcy, you don't get extra time to make up back payments on mortgages or car loans, nor do you get to extend the time for paying debts that are not discharged, such as taxes.
(To learn the ins and outs of Chapter 7 bankruptcy, including what happens to your debt and property, how to file, and more, see our Chapter 7 Bankruptcy area.)
Chapter 13 Bankruptcy: An Overview
Chapter 13 is a court enforced payment or “debt adjustment” plan. Under this chapter, you keep everything you own but you have to pay to the Chapter 13 trustee all of your disposable income every month under what is referred to as the “plan.” The Chapter 13 trustee then uses this money to make payments to your creditors.
The Chapter plan lasts from three to five years depending on your income level. In most plans, you pay your nondischargeable debts in full over the plan period. With few exceptions, creditors have to accept the payments under the plan that is approved by the court. You don’t get your discharge until all the payments that are due under the plan are paid in full. As a result, your fresh start will not begin for three to five years after you filed the Chapter 13.
(To learn more about Chapter 13 bankruptcy and the repayment plan, see our Chapter 13 Bankruptcy area.)
Circumstances Which Might Make Chapter 7 a More Attractive Option
Chapter 7 can be fast and efficient. Any of the following, or a combination, can contribute to making Chapter 7 a more attractive option for you than Chapter 13.
- You don’t have any non-exempt property or you are willing to give up your non-exempt property to get the process done fast. (The majority of filers have little or no nonexempt property.)
- You are current on your mortgage and do not have a second mortgage that exceeds the value of your home.
- You are current on or don’t owe any loans secured by your car.
- You are not behind on any other secured debts or you don’t want to keep the property that secures those debts.
- You don’t owe any taxes or other debts that will not be discharged.
- You do not need extra time to pay any taxes or other non-dischargeable debts that you do owe.
- You want your discharge more quickly.
Circumstances Where Chapter 7 Is the Only Option
Under some circumstances, Chapter 7 might be your only option. These circumstances include the following:
- You don’t have a steady income to make regular payments under the Chapter 13 plan.
- You don’t have enough disposable income to fund a Chapter 13 plan. Creditors must receive at least as much under the Chapter 13 plan as they would have received if you filed a Chapter 7. (To learn more, see The Chapter 13 Repayment Plan.)
- Your debt exceeds the limits for a Chapter 13. You do not qualify for Chapter 13 if you have more than $360,475 in non-contingent, liquidated (easily calculated) unsecured debt and $1,081,400 in non-contingent, liquidated secured debt.
- You want to file bankruptcy for a business entity (other than a sole proprietorship) and not an individual. Only individuals can file for Chapter 13.