One of the first steps in the bankruptcy process is to choose which bankruptcy chapter you’ll be filing under. Choose the wrong Chapter, and you can have significant problems down the line.
Each Chapter serves a different purpose and is the right choice for different scenarios.
In Chapter 7, you give up your assets, and a trustee sells them to pay as many of your debts as possible. Then, your debts are discharged. You may file Chapter 7 even if you don’t have any assets, but you must pass a means test.
Don’t mistake Chapter 7 for losing everything you own. Bankruptcy doesn’t come for household goods or clothing. It’s going after major assets like cash, or home and vehicle equity. You can protect some of your assets with bankruptcy exemptions. Most people who file Chapter 7 don’t lose anything at all.
The disadvantage of Chapter 7 is that if you have too much equity in your home, you’ll have to give it up unless you’re willing to sign a reaffirmation agreement that allows you to keep the mortgage. Likewise, you’ll lose your car unless you’re willing to sign a similar agreement.
You should carefully evaluate whether you can afford your home or your car before signing any such agreements or making any such agreements part of your long-term plan.
Chapter 13 is known as the “wage earner’s plan.” You keep your assets, but you agree to a payment plan. You make payments to a trustee, who distributes your payments to your creditors in priority order.
You don’t necessarily pay every cent you owe on this plan. You pay a significant portion that the courts determine to be fair, and then the courts discharge the rest of the debt.
You must submit your entire budget to the court. Your plan payments will be based on your “discretionary” income, which means you’ll be left with enough money to pay for your basics. The plan typically lasts three to five years.
This plan allows you to seamlessly return to paying your secured debt payments when the plan is done while allowing you to pay any amounts in arrears during your bankruptcy plan.
Which bankruptcy Chapter is right for you?
While choosing between the two Chapters seems simple on the surface, dozens of calculations and evaluations must take place before you can choose the plan that’s truly right for you. It’s not just about what you want, but about which plan will prove to be the best solution for your unique financial situation.
Helping you choose your bankruptcy plan is one of the first services a bankruptcy lawyer performs on your behalf. Are you ready for financial freedom? Schedule a free consultation with our office today.