You’re trying to decide between Chapter 7 bankruptcy and Chapter 13. What are the differences and how do they impact your debts?
The first thing you should know is that you may not be eligible for both. For instance, you can earn too much to qualify for Chapter 7. Assuming you do have a choice, though, let’s take a look at both.
The main difference
Chapter 7 bankruptcy focuses on liquidation. Non-exempt assets have to get sold off, and the proceeds pay down as much of the debt as possible. The remaining eligible debt then gets forgiven.
Chapter 13 focuses on repayment. Instead of selling assets, you agree to a monthly payment plan. You then have to make those payments every month, typically for three to five years, to pay off your debt.
With that in mind, take a look at some specifics.
A car loan
Generally, the car will get repossessed by the lender if you file for Chapter 7. You haven’t paid it off yet. You may have heard that your vehicle is exempt, and there is a useful exemption for your daily driver. However, it typically applies to a vehicle you own outright. If there is still a balance on the loan, you don’t own it.
Under Chapter 13, the car loan can get worked into the repayment plan. You don’t lose the car as long as those monthly payments get made on time.
A home mortgage
A home mortgage is usually treated the same as a car loan. If you own the house outright, the exemption can help you under Chapter 7, but you may lose the house if you still owe money on it. Under Chapter 13, your mortgage payments can get worked into the monthly payments and you stay in the house.
Typically, neither type of bankruptcy can erase your student loans. Even if Chapter 7 is successful, you usually have to pay them off. However, Chapter 13 can help reorganize the rest of your debt so that the student loans become affordable.
Child support or spousal support
Neither of these get eliminated in bankruptcy, as they’re tied to a court order. You still owe the money. You may want to look into asking the court to modify that order, but, until that happens, you need to pay.
Credit card debt and unsecured personal loans
This is the real benefit of Chapter 7, which typically forgives the balance of personal loans and credit card debt after liquidation. Chapter 13 can also eliminate credit card debt through the use of the repayment program.
Which is right for you?
As you can see, both types of bankruptcy have their pros and cons. Be sure you understand your options when deciding which is right for you.