Which Type of Bankruptcy is Best for You?
The vast majority of consumer cases are filed into either Chapter 7 or Chapter 13. So, which type of bankruptcy is best for you?
When comparing Chapter 7 and Chapter 13, each has different pros and cons. In most cases, debtors will take a means test and the type of bankruptcy they file for will be decided that way. Sometimes, debtors have a choice. If you are choosing between Chapter 7 and Chapter 13, consider your goals of filing for bankruptcy. Chapter 7 is typically the fastest option, but Chapter 13 can allow you to keep important assets. Although bankruptcy chapters differ, they share some important similarities, like an automatic stay, debt discharge, and eventual debt relief.
To get a free case review from our Philadelphia bankruptcy attorneys, call Young, Marr, Mallis & Associates today at (215) 701-6519 or (609) 755-3115.
Is There a Best Type of Bankruptcy?
No form of bankruptcy is inherently and universally the “best.” The best type of bankruptcy for you will depend on your unique financial situation, and what you’re trying to accomplish with your bankruptcy. There are instances where Chapter 7 is favorable, while Chapter 13 may be preferable for other people.
Before you can file for bankruptcy, you’ll have to take a means test. In a nutshell, a means test measures your household income against state averages. If your income level falls below a certain threshold, you can file for Chapter 7. If your income level is too high, you will be filed into Chapter 13.
Chapter 7 will require you to liquidate certain assets in order to pay back creditors. Depending on the amount of debt you have, Chapter 7 might require you to liquidate personal property like your car or home. For this reason, Chapter 7 is often less preferable to debtors who want to retain their assets during bankruptcy.
When debtors file under Chapter 13, repayment will take a different path. Instead of satisfying your debts through asset liquidation, you will do so through a repayment plan. This is why passing a means test and confirming you have sufficient income to support the requirements of a repayment plan is important when determining which chapter of bankruptcy you will file for.
That said, some people who qualify for Chapter 7 may be eligible to file for Chapter 13 instead, provided their disposable income is sufficient to cover a repayment plan with creditors.
How to Choose Your Bankruptcy Chapter
Suppose that the means test determined you can file for Chapter 7 but you also have the option of filing for Chapter 13. When choosing between bankruptcy chapters, it is important to consider the pros and cons each have to offer debtors.
When Chapter 7 Bankruptcy Might Be Better Than Chapter 13
Choosing Chapter 7 over Chapter 13 might be ideal for debtors that want to repay creditors as soon as possible. On average, Chapter 7 plans only take four to six months to complete, whereas Chapter 13 plans move much more slowly and can take on average three to five years. If you’re really in a rush, you may want to consider filing an emergency bankruptcy. It is also important to note that Chapter 7 might be less expensive than Chapter 13, as debtors will not have to meet scheduled payments out-of-pocket.
Chapter 7 can also be best for debtors that want to want to eliminate the bulk of their debts. This one seems like a “no-brainer” on the surface — who wouldn’t want to discharge most of their debt? — but it comes with a price. Under Chapter 7, you eliminate most of your debts, but you also stand to lose more of your assets. Under Chapter 13, the repayment requirements are higher, but you may be able to keep more of your property.
If you are concerned about losing your assets during Chapter 7, our Bucks County bankruptcy lawyers can help you use liquidation exemptions. Depending on the state you file in, you may be eligible to benefit from either state or federal exemptions. Such exemptions can help you protect specific assets from liquidation during Chapter 7, such as your car, home, or other property.
When Chapter 13 Bankruptcy Might Be Better Than Chapter 7
If you share debt with others and want to protect them from creditors, you might prefer to file for Chapter 13. If you file under Chapter 7, any co-debtors you might have on a debt will still be liable for paying up, even if you aren’t. If you file under Chapter 13, your co-debtors will be protected from creditors.
Filing under Chapter 13 can be more appealing for debtors who do not want to lose any assets during bankruptcy. While Chapter 13 requires more repayment efforts than Chapter 7, the pay-off is that you will get to keep more of your assets. Under Chapter 7, the price you pay for discharge is liquidation.
Chapter 13 will also allow you to retroactively catch up on missed payments toward your car, or even the mortgage on your home. Chapter 7 does not let debtors “make up” payments that have already been missed.
What Do Bankruptcy Chapters Have in Common?
While Chapter 13 and Chapter 7 are very different forms of bankruptcy, they share a few key similarities. For example, debtors can benefit from an automatic stay, regardless of which chapter they file under. Although dischargeable debts under Chapter 7 and Chapter 13 differ, both types of bankruptcy can relieve debtors of obligations to repay certain debts.
Unless you have filed for bankruptcy multiple times in the recent past, you will be able to benefit from an automatic stay. This will bar any creditors from contacting you about missed payments and halt any impending sheriff sales of your property. An automatic stay will give you and our Bensalem, PA bankruptcy attorneys time to devise a repayment plan or organize your finances as you prepare for bankruptcy. An automatic stay will remain in effect for the duration of your bankruptcy.
Specific debts are dischargeable in bankruptcy. Once debts are eliminated, a debtor will not be responsible for repaying them. Regarding Chapter 13, filers, debts will likely be eliminated once a repayment plan has been completed. You might qualify for a hardship discharge even if you have not completed your repayment plan. Under Chapter 13, debts related to certain tax obligations, property settlements in divorce proceedings, and willful and malicious injury to property are dischargeable.
Chapter 7 and Chapter 13 filers may be eligible to receive a discharge for certain debts that impact their finances more directly. For example, credit card debt and medical debt are typically dischargeable under Chapter 7 and Chapter 13. Debts from personal loans or unpaid rent might be dischargeable as well.
Declaring bankruptcy under Chapter 7 or Chapter 13, whether by your choice or determined by a means test, can result in debt relief. Once either type of bankruptcy is complete, debtors will have repaid creditors and settled any outstanding debt. This allows debtors to rebuild their financial stability.
What if You Can’t Choose Your Bankruptcy Chapter?
If you can’t choose your bankruptcy chapter and the results of a means test place you firmly in either the Chapter 7 or Chapter 13 categories, you will have to proceed with the chapter assigned to you.
Not being able to choose the chapter of bankruptcy you file for is not necessarily a bad thing. For example, if your income suggests you will not be able to meet the payments required by a repayment plan, choosing to do so anyway could land you in a worse financial situation.
Whether you have to file under Chapter 13 or Chapter 7, the initial process will be relatively simple. You will start by filing a bankruptcy petition with the court that includes your financial information and details about your debts and creditors. Court proceedings and mediation might follow to resolve concerns creditors or debtors might have. Then, the process will take one of two directions. If you must file under Chapter 7, assets will be assigned for liquidation. If you must file under Chapter 13, you will devise a repayment plan that must be submitted within two weeks of declaring bankruptcy.
Pennsylvania Bankruptcy Lawyers Offering Free Consultations
To schedule a free, private legal consultation, call our Pennslyvania bankruptcy lawyers at Young, Marr, Mallis & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania, or contact us online.