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Pros and Cons: Chapter 13

If you are considering bankruptcy, you may be wondering what is the best option for you—Chapter 7 or Chapter 13?

It’s important to first understand the differences between Chapter 7 and Chapter 13 proceedings. In a Chapter 7 bankruptcy, you ask the bankruptcy court to discharge (or get rid of) most of the debts you owe.  In exchange, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. With Chapter 13, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time.  The amount you will repay depends on how much you earn, the amount and types of debt you owe, and how much property you own.

A major disadvantage of a Chapter 13 filing is that your debts are not completely wiped out. Although some debtors wish to file for Chapter 7 bankruptcy for this reason, many debtors are not eligible to file for Chapter 7.  Debtors can’t file under Chapter 7 if their income is above the median income for the area or if they have previously filed for a Chapter 7 bankruptcy within the past 8 years or a Chapter 13 proceeding within the past 6 years.

Even if you are eligible for Chapter 7 bankruptcy, however, there are some situations when filing for Chapter 13 is more advantageous:

  • If you are behind on your car loan or mortgage and you want to make up the missed payments over time and hang onto the asset
  • You have a tax obligation, student loans, or other debts that can’t be discharged in Chapter 7.  Instead, you can include these debts in a Chapter 13 plan and pay them off over time
  • You have nonexempt property that you want to keep—When you file for Chapter 7, you only get to keep exempt property. With Chapter 13, you get to keep your property and repay your debts out of your income
  • You have a co-debtor that you want to protect.  In a Chapter 7 proceeding, your co-debtor will still be on the hook for your debt. Under Chapter 13, the creditor cannot do this as long as you keep up with your bankruptcy plan payments
  • You want to pay off your debts over time, but creditors are coming after you.  You can seek the protection of the bankruptcy court in a Chapter 13 proceeding and stop the harassment.

When contemplating bankruptcy, it is important to consider the consequences for all your options.  An experienced bankruptcy attorney can help you select a bankruptcy plan that is the best option for you.

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