Breaking Down Bankruptcy: 7 Vs 13

When people start to think about the possibility of filing for bankruptcy, they often get confused about the types of bankruptcy. The reason for this is that there are two forms of personal bankruptcy: Chapter 7 and Chapter 13. Which one applies to your situation will depend upon your personal finances and whether you qualify to file for one or both forms of bankruptcy. The following is an overview of both types of bankruptcies as well as alternatives to bankruptcy.

Chapter 7 Bankruptcy
When people think of bankruptcy, this is the type they usually have in mind. When a person files for Chapter 7, it is possible to have all of their debts washed away, and they are given a fresh financial start. Filing for this type of bankruptcy can be appealing. The idea of all of your debts disappearing overnight is like a dream come true. What you need to be kept in mind is that an individual must qualify for this type of bankruptcy. Qualifications that must be met include annual income and assets. Income will need to be below the median income for the state a person resides, and any assets not exempt from bankruptcy will need to be liquidated to pay creditors. Equally important to understand is that not all debts can be discharged by a bankruptcy. Student loans and back child support are debts that will still exist after a Chapter 7 bankruptcy. Many court judgments and taxes owed cannot be bankrupted as well.

Chapter 13 Bankruptcy
When filing for Chapter 13, an individual’s debts are reorganized and often reduced. Interest is usually suspended, and a lump sum is paid once a month to a trustee who then distributes the money to creditors per a formula approved by a judge. There are several advantages to this type of bankruptcy. The first is that a single payment is made each month instead of several to a variety of lenders. This gives a borrower a chance to breathe and take control of their finances. A Chapter 13 bankruptcy will eliminate monthly interest from adding more to the debt. A fixed amount of money is owed and paid for in monthly installments for the period of the Chapter 13 bankruptcy. This can be several years. After this time has elapsed, the bankruptcy is discharged, and you will owe no debts other than the ones not covered in a bankruptcy.

Which Bankruptcy Is Best?
The standards for qualifying for a Chapter 7 bankruptcy are much stricter than those for a Chapter 13, so usually if an individual qualifies for both, it is a Chapter 7 filing that is a better choice. This is because more debt will be discharged in a shorter frame of time than under a Chapter 13. However, both bankruptcies will affect your credit negatively for 10 years. Which type of bankruptcy a person decides to file is not nearly as important as whether to file in the first place. There are long term consequences to an individual’s personal finances that should be avoided as much as possible.

Alternatives to Bankruptcy
One of the most popular ways to avoid bankruptcy is a consolidated loan or using consolidated debt services. There are companies that specialize in negotiating with lenders to reduce and consolidate debt for a consumer and give them a chance to avoid a bankruptcy.

Regardless of what path is chosen to get out of debt, bankruptcy should not be taken lightly. It can be a life changing decision, and not everyone is better off after going through a bankruptcy. Debt counseling and debt consolidation services need to be used first.