Once you know you need to file a bankruptcy, the next question that should be addressed is whether a Chapter 7 or Chapter 13 is the best option for you. Most debtors are eligible for relief under either chapter, but the relief offered and eligibility differ. Determining which is best for your financial situation should probably be done in consultation with an experienced bankruptcy lawyer. There are few hard and fast guidelines, but I try to steer my clients toward a Chapter 7, unless one of four factors points toward Chapter 13. While I love Chapter 13 plans because they allow a lot of creativity, what’s most fun for me isn’t necessarily what’s best for my clients.
All things being equal, a Chapter 7 typically takes three to four months from filing to discharge and debtors receive their discharge without making payments on their unsecured debts. By contrast, Chapter 13s typically take three to five years and debtors only receive their discharge after completing all plan payments. Of course, all things aren’t always equal, so these are the things I consider when evaluating which Chapter of bankruptcy my clients should file.
- Previous Bankruptcy Filing: There are several sections of the Bankruptcy Code addressing restrictions on multiple filings. The most significant one is that individuals are only eligible to file a Chapter 7 bankruptcy every eight years. There are restrictions on Chapter 13 filings as well, but those come up less frequently.
- Non-Exempt Assets: You can’t always protect all assets in a Chapter 7 bankruptcy. If my clients would rather not lose a non-exempt asset, we can file a Chapter 13 for them allowing them to repay their unsecured creditors as much during the life of the plan as those creditors would have received through a Chapter 7 liquidation.
- Debt Issues: Sometimes, debts are better handled through a repayment plan than through a Chapter 7. The most common examples are mortgage arrearages, which can be repaid through a Chapter 13 plan to stop a foreclosure and priority debts, like recent tax debts, which can be repaid, but not discharged in a Chapter 7.
- Income Issues: The intended purpose of the 2005 bankruptcy law changes was to make it harder for higher income people to file for Chapter 7. If your income is above average for your state, you’ll want to talk to an experienced bankruptcy attorney to determine whether you can defend being in a Chapter 7 or whether filing a Chapter 13 will be your best option.
Obviously, this is only an extremely brief overview of the issues involved in determining what chapter of bankruptcy is best for you. Consulting with an experienced bankruptcy attorney will allow you to weigh all the factors involved to help you make the best decision for your financial situation.