Some people may only file one form of bankruptcy. There is a means test, and often, the means test will shunt a borrower into one plan or the other.

Nevertheless, some people do have a choice. If you’re one of them, you must know which bankruptcy chapter is right for you.

Here are the advantages and disadvantages of both chapters. Both chapters allow you to take advantage of the bankruptcy protection known as the “automatic stay.” Some debts may not be discharged under either Chapter. 

Chapter 7

A Chapter 7 bankruptcy is also known as a “liquidation” bankruptcy. In this Chapter, all your assets are sold to cover as much of your debt as possible, and the rest is discharged. 

Pros

1. Chapter 7 bankruptcy is perfect for people who don’t have assets to begin with. The debt simply gets discharged. Free and clear. 
2. Chapter 7 has exactly the same effect if you have assets, but those assets are small enough to protect with bankruptcy exemptions. 
3. Chapter 7 is over quickly. You can resolve a Chapter 7 bankruptcy in six to nine months.

Cons

1. You must pass a means test. If your monthly income is too high, you cannot file Chapter 7. 
2. If you have a house or a car, you may be unable to keep them under a Chapter 7 plan. Sometimes, you may keep them by reaffirming the debt after your discharge.

Chapter 13

Chapter 13 is also known as the “wage-earners” plan. When you file Chapter 13, you must enter into a three to five-year plan during which you’ll pay the majority of your debts over time, with one monthly payment.

Any debts that are left over after the plan is complete receive a discharge. 

You must be able to show that you can make the plan payments, and the plan must pay back an acceptable amount of money. 

Pros

1. If you have a house or a car you’d like to keep, you can generally keep them. The plan will allow you to stay current while paying your arrears.
2. The automatic stay is in effect when you’re paying back your plan. 
3. There are some debts you may discharge in a Chapter 13 bankruptcy that you may not discharge in a Chapter 17 bankruptcy. 

Cons

1. Chapter 13 takes a long time. 
2. During the Chapter 13 process, the trustee gets a great deal of say over how you use your money, and you must report changes in financial circumstances to your trustee. 

Schedule a Consultation Today 

Ultimately, it’s important to choose the bankruptcy plan that’s the best fit for your financial situation.

Call our office to schedule a free consultation today if you’re contemplating bankruptcy. We’ll help you choose the plan that is right for you. 

See also:

What Are the Duties of a Bankruptcy Trustee?

3 Debts You Can Discharge in Chapter 13 that Can’t Be Discharged in Chapter 7

How to Prepare for Bankruptcy