When explaining to people the difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy, people often ask me why anyone would pick a Chapter 13 over a Chapter 7. In short, a chapter 7 bankruptcy eliminates debt while a chapter 13 requires repayment through the court, which is different from credit consolidation. Like most things in law, and especially in bankruptcy law, nothing is quite as simple as it might at first seem. That is not to say that bankruptcy can’t be simple- but understanding the complex laws behind it and knowing how to go about it is difficult (which is why it is important to have a bankruptcy attorney guiding you. I don’t recommend doing it yourself).
Understand that which chapter of bankruptcy one should file for is rarely a choice. By law, attorneys are required to give you all available options under bankruptcy so that you are familiar with what ‘chapters', or types, of bankruptcies there are. We want you to be making an informed decision about your bankruptcy (including the decision not to file), but the type of bankruptcy that you file will ultimately boil down to which one is best suited to you when a number of factors are taken into account, including the type of debt that you have, what you own, and what your goals are. Chapter 7 eliminates unsecured debt which includes things like credit cards and medical bills. It does not eliminate debt on secured items like cars and houses. If you want to keep your car or your house, you still have to pay for it, albeit perhaps under different terms. This is where a Chapter 13 comes in to allow you to catch up on past due secured payments like a mortgage so that you can keep your house. Other benefits of Chapter 13 include:
- Keeping your property, which is useful if you have more than what is allowed in Chapter 7 (this has to do with allowable ‘exemptions’ under the law)
- Preventing the foreclosure of your house
- Reduction of car payment
- Protection from creditors during your plan term
- Allowing you to pay past due balances without breaking the bank
In order to be able to file for chapter 13, you must have a steady stream of income. Chapter 13 will not work for someone who is unemployed but has been known to help those who were unemployed, got behind on payments, found a steady job, and are now trying to rebuild and straighten out their financial situation. It is a good way to get back on your feet after a period of unemployment, illness or other setback. On the other hand, Chapter 7 is often going to be better suited for the debtor who either rents or is current on a mortgage for a home (that doesn’t have too much equity) and who doesn’t have too many assets. Chapter 7 often works well for those who don’t have any money left over at the end of the month and thus, could not afford to send payments in to the bankruptcy court each month.
If you are struggling with debt, it is time to get serious and make a concrete plan to get out of it. For many, bankruptcy is that plan. Let O’Connor Cadiz Law help you figure out what your options are. Give us a call at 630 250-8813. There is hope.