Michael Koch, Esq. Lockhart, Britton & Koch Michael Koch, Esq. Lockhart, Britton & Koch
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Pros and cons of chapter 7 and chapter 13 bankruptcy

Being in debt is a horrible situation for anyone. Deciding whether to file bankruptcy is not any easier. Bankruptcy does offer a chance to move forward though. Some people considering bankruptcy are not aware that there are two types available: chapter 7 and chapter 13. Both types have pros and cons to weigh.

The main difference

The biggest difference between chapter 7 and 13 bankruptcy is in how they provide debt relief. Chapter 7 discharges your debts after paying back a portion that you are able to afford. After that, you are debt-free. Chapter 13 does not discharge it completely, but it allows you to reorganize your debts and set up a repayment plan over the next 3 to 5 years that you can manage in your situation.

You must be eligible for chapter 7. If you do not meet the requirements, you must choose chapter 13 bankruptcy. Even if you qualify, you should understand the advantages and disadvantages of both types to make sure you choose the best option for your circumstances.

Chapter 7

As stated above, chapter 7 bankruptcy requires you to pay a portion of your debts and then the rest is discharged. The main benefits are the fact that you are debt-free afterwards and the process is quick, usually only lasting 3 to 6 months. Creditors must also stop harassing you once you file. Some of your belongings can be sold to make payments, but property like your home and car are protected.

The biggest downside is the damage to your credit. Bankruptcy stays on your credit score for up to 10 years and you may struggle to get a mortgage if needed. However, missing payments and accumulating more debt is harming your credit score too. You can also lose your credit cards and some of your belongings that must be sold.

Chapter 13

Chapter 13 not only creates a payment plan that is easier for you to manage, but it may allow you to reduce the overall amount you owe. Unlike chapter 7, none of your belongings will be sold to make payments. You can file chapter 13 as many times as you want, so it is still an option if you run into financial trouble again later. Once you file, creditors must stop harassing you.

Chapter 13 shares the downside of damaged credit and loss of credit cards but, again, your score is being damaged by missing payments in the first place. Another downside to chapter 13 is the limit on your income for the next few years. Because you still need to make payments, your budget after the necessities may be tight.

No one should file bankruptcy without plenty of thought and legal counsel. A bankruptcy attorney will have a full understanding of the impacts of bankruptcy and your options for dealing with debt. If you are considering bankruptcy, consult an attorney about the next steps to take.

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