If you’re considering bankruptcy, it’s important to understand the different types of debts and how they are treated in both Chapter 7 and Chapter 13 bankruptcies. While both types of bankruptcy can help you get a fresh financial start, they have different rules when it comes to which debts are dischargeable and which ones need to be paid back.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as “liquidation” bankruptcy because it involves selling off some of your assets to pay back your creditors. This type of bankruptcy is best for people who have little or no disposable income and cannot afford to pay back their debts over time.
In Chapter 7 bankruptcy, most unsecured debts can be discharged. Unsecured debts include credit card debt, medical bills, personal loans, and payday loans. However, not all debts can be discharged in Chapter 7. Non-dischargeable debts include:
- Student loans
- Taxes owed within the past three years
- Child support and alimony
- Debts incurred through fraud or willful misconduct
- Fines or penalties imposed by government agencies
If you have secured debt (debt that is backed by collateral), such as a mortgage or car loan, you may be able to keep the property if you continue making payments on time. If you’re behind on your payments, however, the lender may be able to repossess or foreclose on the property.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as “reorganization” bankruptcy because it involves creating a repayment plan that allows you to pay back some or all of your debts over a period of three to five years. This type of bankruptcy is best for people who have a steady income but are struggling with overwhelming debt.
In Chapter 13 bankruptcy, most unsecured debts can be discharged just like in Chapter 7. However, there are additional benefits in Chapter 13 for certain types of debt. For example:
- Secured debt: You may be able to keep your property if you create a repayment plan that allows you to catch up on missed payments.
- Taxes: Some tax debts may be dischargeable depending on how old they are and other factors.
- Student loans: While student loans cannot be discharged in either chapter of bankruptcy under normal circumstances, filing for Chapter 13 can give you breathing room while you work out a payment plan with your lender.
- Co-signed debt: If someone else cosigned a loan with you and that person would become responsible for repaying the loan if you file for bankruptcy, filing for Chapter 13 can protect them from having to repay the debt.
It’s important to note that not everyone qualifies for Chapter 13 bankruptcy. To qualify, your unsecured debts must be less than $419,275 and your secured debts must be less than $1,257,850.
Which Type Of Bankruptcy Is Right For You?
Deciding whether to file for Chapter 7 or Chapter 13 depends on several factors including your income level, amount of debt owed and type of debt owed (unsecured vs secured). It’s always best practice to speak with an experienced Montgomery bankruptcy attorney about what option is right for your specific situation.
In general terms, if most of your debt is unsecured (credit cards etc.) and/or if you have little disposable income each month then filing for chapter seven might make more sense since most unsecured debt will likely get wiped clean during this process.
If however most of your debt comes from secured sources (home/car) or if there has been an interruption in cash flow causing missed payments then filing under chapter thirteen could provide much needed relief by allowing time for catching up on missed payments while protecting property from foreclosure/repossession.
Filing for either chapter seven or thirteen should never feel like an easy decision but understanding what each type offers can help guide those decisions towards what solution might provide lasting relief from financial stressors. Remember though – every individual’s situation is unique so consulting with an attorney experienced in this field should always come first!