Are you thinking about declaring bankruptcy? You might not realize there are two types: Chapter 7 and Chapter 13. While most people think of Chapter 7 bankruptcy first, Chapter 13 bankruptcy can be advantageous as well, depending on your specific situation.
Chapter 7 and Chapter 13 Bankruptcy
Before we start talking about the differences between Chapter 7 and Chapter 13 bankruptcy, let’s talk about the similarities these two types of bankruptcy share. Both Chapter 7 and Chapter 13 bankruptcy are designed to alleviate financial hardship. To that end, you must show that you are undergoing significant financial hardship to declare bankruptcy.
Under both Chapter 7 and Chapter 13 bankruptcy, there will be certain things that are “protected.” That will include your house and your car, usually, up to a certain amount. Both Chapter 13 and Chapter 13 bankruptcy will initially hurt your credit report, but will slowly stop hurting your credit report over time (and will eventually drop off altogether).
The process of filing bankruptcy is going to be similar, as you’ll have someone helping you and taking a look at your financial documents to determine what you qualify for. Ideally, you should be working with a bankruptcy attorney, who will help you get your financial documents in order and who will advise you on the right process for you. You may also want to consult with an accountant, financial advisor, or tax planner, to find out what the ultimate consequences will be.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is what most people think of when they think about “bankruptcy.” It’s a complete liquidation, where you liquidate your assets and use them to pay off your debts. The debts that remain (with some exceptions such as student loans) will ultimately be dissolved. There are a lot of advantages to Chapter 7; you can walk away free and clear of debt quickly, and you can start getting on good footing right away. But it also drastically affects your credit score.
The downside to Chapter 7 bankruptcy is that it does require liquidation of assets and you have to show that bankruptcy is your only possible course of action; it can’t be shown that it would be feasible for you to enter into a payment plan and pay off your debts over time.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is similar to a structured payment plan. With Chapter 13 bankruptcy, you’ll create a payment plan over 3 to 5 years to pay everything off. This is easier to file for, because the bar for proving financial need is a lot lower, and you don’t need to dissolve your assets to do so. Any debts that remain after the 3 to 5-year term will be dissolved much like Chapter 7.
At the same time, Chapter 13 bankruptcy does mean you’ll be going through the bankruptcy process longer, you’ll have to continue pay your debts, and you still are going to get a credit hit even if it may not be as substantial. Chapter 13 bankruptcy might be all you qualify for, but you could also consider an unofficial consolidation (getting a consolidation loan) instead.
Which Bankruptcy Is Right For Your Situation?
The long and the short of it is that you will usually be told what you qualify for first. If you can reasonably pay your debts off, you’re may be directed to Chapter 13. If you can’t, you’ll may be directed to Chapter 7. But it’s also about what you want. If you do get a choice, Chapter 7 bankruptcy is usually preferred because it’s such a clean slate. Chapter 13 can be desired by those who just want a simpler way to pay off their debts while keeping their assets.
Deciding to commit to declaring bankruptcy is never easy, but many people begin immediately improving their credit score once they have declared. It’s a complicated financial question with a lot of moving parts, and you will need to go through a financial audit before you can decide which option is best for you.
Are you thinking about bankruptcy? It’s time to call the professionals. Call Trapp Law, LLC at (317) 423-1823 to find out more about your options.