How to Determine if Chapter 7 or 13 Bankruptcy is Best for You

Benefits of Chapter 7 Bankruptcy Chapter 7 bankruptcy, also known as liquidation, occurs when a trustee takes over the assets of a debtor’s estate. Then the trustee, under bankruptcy court supervision, reduces the debtor’s assets to cash and makes distributions to creditors. The distributions are made subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Generally, Chapter 7 cases have little or no nonexempt property, which can affect the distribution that unsecured creditors may receive from the debtor. Generally unsecured creditors will receive a distribution only if there were assets to liquidate and they file a proof of claim with the bankruptcy court. Perhaps most importantly, most debtors who file as individuals receive a discharge that releases them from personal liability for certain dischargeable debts. This may include discharging taxes under Chapter 7. It should be noted that to be eligible for Chapter 7 bankruptcy, a debtor must pass the means test. The means test is used to determine whether individual consumer debtors qualify for relief under Chapter 7. If a debtor’s income exceeds certain thresholds they likely will not be eligible for Chapter 7 relief.

Benefits of Chapter 13 BankruptcyChapter 13 bankruptcy is designed to serve individual debtors who have a regular source of income. If the debtor has a regular source of income, he or she could potentially submit a plan to repay creditors over three to five years. The bankruptcy court must approve this repayment plan and the debtor must have sufficient funds out of their regular income to pay previous debts and remain current on all other debts. One of the biggest differences between Chapter 13 and Chapter 7 bankruptcy is that Chapter 13 bankruptcy often allows the debtor to retain their home, but does not allow a debtor to receive an immediate discharge of their debts like Chapter 7 bankruptcy, which is a quicker process.

Reasons to Choose Chapter 13 Depending on your needs, there are several reasons to choose Chapter 13 over Chapter 7 bankruptcy. For instance, if you are behind on your mortgage or maybe even a car loan, Chapter 13 allows you to reorganize your debt so that you can remedy missed payments and possibly even renew your original agreement. Many individuals are currently facing student loan debts that are not dischargeable and that they may not be able to afford. However, Chapter 13 bankruptcy may allow you to include student loan debt into a repayment plan to make payments more affordable. Depending on the circumstances, tax obligations or other forms of debt not discharged by Chapter 7 bankruptcy may also be included in a Chapter 13 reorganization plan. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not require you to forfeit any property deemed nonexempt under state or federal law or any property at all for that matter. Instead of giving up property, a Chapter 13 debtor repays debts out of their income as discussed earlier. If you have property that would be liquidated in a Chapter 7 bankruptcy that is valuable to you, Chapter 13 bankruptcy may be for you. However, there are also cases where Chapter 7 debtors can retain their property. An experienced attorney can help you make a decision about which approach is best for your financial circumstances. It is not uncommon for debtors to also have co-debtors. Chapter 7 bankruptcy does not discharge a co-debtor’s liability, and a co-debtor will likely be targeted by creditors in a Chapter 7 bankruptcy. In Chapter 13 bankruptcy, creditors will generally not target a co-debtor if a debtor stays current on their repayment plan.

Reasons to Choose Chapter 7 Chapter 7 bankruptcy is a popular choice over Chapter 13 bankruptcy if a debtor does not have a regular income and cannot afford to repay their creditors in a span of three to five years. One of the main reasons many people choose Chapter 7 bankruptcy over Chapter 13 is that various forms of debt that can be discharged practically immediately. Another reason a debtor would choose Chapter 7 over Chapter 13 bankruptcy is that the majority of, or sometimes all of, their debt is dischargeable under Chapter 7 bankruptcy. Debts like credit card bills or medical bills would fall under dischargeable debts. Since bankruptcy courts typically issue a discharge of debt within roughly four to six months, a Chapter 7 bankruptcy may be preferred as a possible panic button if creditors are closing in.

Need Debt Relief? Contact Our Roseville Bankruptcy Attorneys for Help As we have discussed, there are plenty of factors to consider when facing the idea of filing for bankruptcy. While some decisions may seem clear-cut, the U.S. Bankruptcy Code is an intricate set of laws that should be approached with care and diligence. The Roseville and Sacramento bankruptcy lawyers at the Bankruptcy Group are dedicated to helping clients navigate their way through bankruptcy court, filing Chapter 13, and filing Chapter 7 bankruptcy. We will work diligently to pursue the financial outcome you deserve. Contact us today at for a free consultation.