Mending Your Finances: Filing for Chapter 7 vs Chapter 13 Bankruptcy
Almost one million people and business entities file for bankruptcy on an annual basis. That number comes as a surprise to many people given today’s flourishing economy.
For the uninitiated, bankruptcy is a legal filing that you can petition for in court that enables borrowers to enjoy some relief from their debt. Under federal law, bankruptcy can only be filed for twice in a lifetime and you must meet certain qualifications in order to be eligible. To make things more complicated, there are two primary types of bankruptcy filings, Chapter 7 and Chapter 13.
In this post, we’re going to explore Chapter 7 vs Chapter 13 bankruptcy pros and cons in order to bring more clarity to which filing might be best for you if you ever find yourself overwhelmed by debt.
Chapter 7 Bankruptcy
When you think about bankruptcy, the idea that you have in mind almost certainly aligns with the conditions set under Chapter 7 Bankruptcy since it lets you discharge the vast majority of your debts. Here are some key Chapter 7 advantages and drawbacks:
Pro – Any Entity Can File for Chapter 7 Bankruptcy
One of the key Chapter 7 vs Chapter 13 differences is that any entity can apply for this type of bankruptcy if they meet certain thresholds. For example, if you were a small business owner and your business over-leveraged debt, you could petition for Chapter 7 Bankruptcy in court and absolve your company’s liabilities. Individuals can also apply for this class of bankruptcy.
Pro – It May Absolve All of Your Debt
When most people file for bankruptcy, they do so to not have to deal with their lenders anymore. For the most part, filing Chapter 7 Bankruptcy will achieve that end.
Once bankruptcy is filed, lenders can only collect a debt through the sale of any non-exempt property that you have (more on that in a moment). If you don’t have any property that meets non-exempt qualifications, lenders are out of luck.
Pro – The Opportunity for a Fresh Start
Nothing affects people’s lives quite like the feeling of being buried under debt. While filing for Chapter 7 Bankruptcy is not without its lifestyle drawbacks, once everything is complete you can wake up in the morning without having to worry about owing money to anyone.
Con – You Must Be Low-income to Qualify
The big catch with Chapter 7 Bankruptcy is that you have to be under certain income thresholds to qualify or it. Getting a consultation from this law firm or another local bankruptcy specialist can help you to better understand how your unique financial situation qualifies or disqualifies you from claiming Chapter 7 Bankruptcy.
Con – You Will Lose Your Non-Exempt Property
There are certain types of property that you will have to forfeit in order to go through with Chapter 7 Bankruptcy. Every state has a different “Exemption Charter” that lets you know what lenders can and can’t take from you in order to recoup portions of their debt, so you should check with local regulations.
Chapter 13 Bankruptcy
Most people that file for Chapter 13 bankruptcy do so because they don’t qualify for Chapter 7. Others prefer Chapter 13 due to its flexibility with their owned property. Here’s a brief rundown on filing this type of bankruptcy:
Pro – You Can Keep Your Property
If you live in a state where something important like your house is not exempt from bankruptcy repossession under Chapter 7, filing for Chapter 13 bankruptcy allows you to keep it. In exchange for keeping the property, the courts will ask that you continue making payments to lenders, albeit at a much lower rate, that you should be able to manage based on your income.
Pro – The Vast Majority of Borrowers Qualify
As of today, you can declare Chapter 13 Bankruptcy if you have in the vicinity of half a million dollars worth of unsecured debt or less. Because of that very high threshold, even the most indebted borrowers can find relief through a Chapter 13 filing.
Pro – You May Take Less of a Hit to Your Credit
When you file for bankruptcy, your credit takes a major hit. With Chapter 13 Bankruptcy, though your credit score won’t be untouched, you may soften some of that blow since you’ll still be paying off your debt to lenders as opposed to asking courts to forgive your debt.
Con – Debt Payments Will Need to Be Made
If your goal is to rid yourself of debt, Chapter 13 Bankruptcy doesn’t do that as well as Chapter 7 does. As we’ve mentioned, you’ll still need to make monthly payments to dig yourself out of your debt hole. As long as you keep up with those payments, debtors cannot harass or take legal action against you.
Con – No Relief for Businesses
Any businesses that are thinking of filing for Chapter 13 Bankruptcy because they’d like to keep their property are going to have to think again. Chapter 13 Bankruptcy is only available to individuals.
Our Chapter 7 vs Chapter 13 Recommendation
Now that we’ve reviewed Chapter 7 vs Chapter 13 Bankruptcy, the big question is which filing is right for you? At the end of the day, only you and your lawyer can decide that.
What we will say though is that if your goal is to make your debt disappear, Chapter 7 is your best bet. If your goal is to retain your property and halt harassment from lenders, Chapter 13 is a good option assuming you can meet the monthly payment obligations.
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