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Chapter 7 vs. Chapter 13 – Which Bankruptcy Should You File?

Brian P.
March 17, 2017

If you have overwhelming debt, unpaid medical bills, judgments or wage garnishments, bankruptcy can help you eliminate these things and get a fresh start. Consumers have two choices when it comes to the type of bankruptcy to file —chapter 7 vs. chapter 13. It can be hard to know which type of bankruptcy is right for you. So, what is the difference between chapter 7 and chapter 13?

  • Chapter 7 – This is the most common and quickest type of bankruptcy. Here is how Chapter 7 works—it allows you to discharge or eliminate most debts, including credit card, collections, and medical debt. This bankruptcy is best if you don’t have very many assets. You must also meet certain income requirements to file a Chapter 7 bankruptcy.

  • Chapter 13 – This type of bankruptcy is best for you if you have expensive assets that you want to keep, such as a car or house. With a Chapter 13, bankruptcy, you repay your creditors some of your debt under a 3 to 5-year plan. Some debts, such as credit card bills, may be completed eliminated under a Chapter 13 bankruptcy while others may need to be paid back. A Chapter is also ideal if you don’t qualify for a Chapter 7 bankruptcy because you make too much money.

There are different eligibility rules and benefits to each type of bankruptcy. We’ll go over each type of bankruptcy to help you decide which one is right for you.

When to File Chapter 13

A Chapter 13 bankruptcy is a powerful tool that allows debtors to get a fresh financial start. It is particularly useful for borrowers that do not qualify for Chapter 7 bankruptcy. Here are some other instances where a Chapter 13 bankruptcy might be ideal.

  • You have debts that are not dischargeable under a Chapter 7, such as taxes.

  • You have expensive assets, such a car or house that you have equity in and that you want to keep.

  • You and behind on your mortgage and you want to stop foreclosure.

  • You don’t qualify for a Chapter 7 Bankruptcy because your income is too high.

When to File a Chapter 7 Bankruptcy

A Chapter 7 Bankruptcy, also called a liquidation bankruptcy, allows you to discharge most of your debts. In Chapter 7, a court-appointed trustee will liquidate or sell any assets that you own to pay off your debt. Any debt that is left after your assets are sold will be discharged, meaning that you won’t have to pay it back. Chapter 7 is ideal if:

  • You don’t own expensive assets.

  • Your mortgage payment is current, you have very little equity in your home, and you want to keep your house. If you don’t have very much equity in your home, you may be able to keep your home by reaffirming the debt or agreeing to continue making the payments on the home after the Chapter 7 Bankruptcy—as long as you are not behind on your mortgage.

  • You don’t make a lot of money.

What Happens After Chapter 7 Bankruptcy

Even if you are drowning in debt, you might be reluctant to consider bankruptcy as you’ve probably heard many bankruptcy myths. Don’t worry—you are not alone. Many people who are thinking about filing are worried about what will happen after they file. Bankruptcy laws were made to help people not hurt them.

Here is what will likely happen after Chapter 7 Bankruptcy:

  • You’ll experience a sense of relief at having your debts eliminated.

  • You can begin to rebuild your credit – Many people that file bankruptcy have better credit scores after their discharge. This is because a bankruptcy immediately and drastically reduces your debt-to-income ratio, which is partially used to determine credit scores. You might even find it easier to get credit post-bankruptcy than before.

  • You can start to save money. Now, that you’ll have room in your budget, you can focus on saving money so that you are prepared for unexpected events like medical illness.

Free Consultation from Top Bankruptcy Lawyers in Los Angeles

If you want to get started on a new financial life and get financial freedom today, it is best to contact an experienced bankruptcy attorney.

If you need help filing bankruptcy, reach out to Consumer Center for Resources. We will connect you with one of the top bankruptcy lawyers in Los Angeles.

The consultation is FREE!