If you're considering filing for bankruptcy, chances are that you're going to need to choose between a Chapter 7 and a Chapter 13 bankruptcy filing, the two most common filings for personal bankruptcy (Chapter 11 is another common filing you may have heard of, but it's usually reserved for businesses.) Choosing the right chapter for your situation is an important factor in ensuring that you get back on the road to financial health. Many people opt for the Chapter 7 filing because it's the "clean slate" bankruptcy chapter – it's the simplest, fastest, and most straightforward bankruptcy filing. However, that doesn't mean that it's always the best choice. Take a look a few reasons why a Chapter 13 filing might be a better choice for you.
You're Facing a Foreclosure
If you're a homeowner facing foreclosure, this may be the most important difference between a Chapter 7 and a Chapter 13 bankruptcy. A Chapter 7 bankruptcy will delay a foreclosure, but it usually can't stop the foreclosure from occurring eventually. Under a Chapter 7 bankruptcy filing, you're required to relinquish certain property, which will be liquidated and divided among your creditors, and the rest of the debt is wiped out. Your mortgage, however, won't go away – it's an ongoing debt, and you'll still have to make payments on it after the bankruptcy proceeding is over with. If it's already in foreclosure, there's no requirement that the mortgage company work out a payment plan with you. The bankruptcy proceedings will slow down the foreclosure, but if you can't pay the bank, they will take your house.
A Chapter 13 bankruptcy, however, is essentially a detailed repayment plan. You'll make payments that are based on your income each month to your bankruptcy trustee, and those will be disbursed among your creditors. It takes much longer to complete than a Chapter 7 bankruptcy, because the plan gives you several years to catch up on the payments for the debts that you owe – including your mortgage debt. And once you reach the end of the allotted time period, assuming you've made all of the agreed upon payments, there will be no need for a foreclosure, because your mortgage will be current.
If you have two or three mortgages and believe that your payments won't be enough to catch up on all of them during the bankruptcy period, and if you owe more on your original mortgage than your home is worth, you may be ready to consider just giving up the home and going with a Chapter 7 filing. What you may not realize is that you can benefit from a process known as lien stripping, which is only available with the Chapter 13 filing. Lien stripping in chapter 13 bankruptcy dismisses the second (or third) mortgage debt as long as you complete the bankruptcy successfully.
You Have Debt That Can't be Discharged by a Chapter 7 Filing
It would be terrible to go through all of the trouble of filing for bankruptcy, receive the black mark on your credit report, give up property – and come out of the bankruptcy with debt still hanging over your head. But that's exactly what can happen if you owe certain types of debt.
Not all debts can be discharged in a Chapter 7 filing. Some examples include tax debts, student loans, and back child support. If you owe money because you were found liable in a personal injury lawsuit, or you own court costs, fines, or other fees to the government, those can't be discharged either.
Many people believe that these types of debts can't be included in a bankruptcy at all, but that's not true. While these debts may not be dischargeable under a Chapter 7 filing, they can be included in a Chapter 13 repayment plan. So if you owe a heavy student loan debt, filing a Chapter 13 plan that allows you to pay those debts back with a monthly payment that fits in your budget might be a smarter move than filing a Chapter 7 bankruptcy and continuing to owe payments that you can't afford even after the bankruptcy is complete.
Because you're not a bankruptcy expert, it's easy to misunderstand certain nuances of different bankruptcy chapters. Unfortunately, those misunderstandings can lead to choosing a chapter that doesn't benefit you as much as a different chapter would have. Before you make any decisions about filing for bankruptcy, make an appointment with a bankruptcy attorney to review your financial situation. You may be surprised to learn which bankruptcy filing will help you the most.