Choosing between Chapter 7 and Chapter 13

Although the economy is said to be improving, many in Mississippi and across the nation are still suffering from the effects of the recession. If you are in this category, you may be considering bankruptcy as a solution to your debt problem. However, you may have learned that there are two types of bankruptcy for consumers: Chapter 7 and Chapter 13. Deciding which bankruptcy is right for you is an important first step on the road to financial recovery that should not be taken lightly.

Chapter 7

For many consumers, Chapter 7 is the more popular option, because it is a quick process. Debt is discharged in this type of bankruptcy in as little as three months, allowing filers to quickly get rid of their credit card, medical bills and many other forms of debt.

What is probably the scariest aspect of Chapter 7 for most people is that it can involve liquidation (or selling) of assets. Many people fear that they will have to give up most of their assets during the bankruptcy process. However, this is not the case, due to bankruptcy exemptions. Both Mississippi and federal law allow filers to keep certain important assets up to a certain value, such as a motor vehicle, house, furniture and other personal items. As a result, most Chapter 7 filers do not lose any property during the process.

Due to its nature, Chapter 7 is ideal for those with few unencumbered assets that are not exempt from liquidation by law. In addition, since Chapter 7 requires filers to pass a means test, it is not ideal for those with large amounts of disposable income.

Chapter 13

Chapter 13 is a type of bankruptcy that may be a better fit for those with a steady income or significant nonexempt assets. During Chapter 13, the filer makes a repayment plan providing for the repayment of certain debts over a three to five-year period. Once the court approves the payment plan, the filer makes affordable monthly payments that are based on his or her disposable income towards the debt. As long as the payments are made, the filer does not lose any property. At the end of the repayment period, most debts that are not paid in full during the bankruptcy are discharged.

Chapter 13 is especially helpful for those facing foreclosure. Once Chapter 13 is filed, the automatic stay stops the foreclosure action. In the repayment plan, the filer can provide for the payment of overdue mortgage payments, becoming current on the mortgage at the end of the repayment period. As long as the payments are made each month, the lender may not foreclose.

In addition, Chapter 13 can help those that would like to keep property that would be lost in a Chapter 7, such as a second home. As long as the value of the property that is not covered by the exemption is paid over the three to five years, the filer may keep the property from falling into creditors' hands.

Speak to an attorney

For assistance in deciding which type of bankruptcy would be right for you, contact an experienced bankruptcy attorney. An attorney can consider your situation, recommend the best solution and advise you throughout the process.