Deciding between the two main types of bankruptcy -- Chapter 7 and Chapter 13 -- is the first step you need to make towards filing. Chapter 7 bankruptcy means that your assets (the items of value that you own) are liquidated (where your assets are sold, turning them into cash) and the proceeds given to your creditors. When you choose Chapter 13 bankruptcy, you are given a payment timeline of no more than 5 years to repay your creditors. Payments will usually be made on a monthly basis, and you may be able to pay less than the actual debt amount. If you have already secured a bankruptcy lawyer, she can help you determine whether you qualify for both types and, if so, which type would be best for you situation.
Chapter 7 and Chapter 13 each have unique qualities and features that an individual will either find attractive or undesirable. One type is not inherently better than the other; what is a pro to you may be a con to someone else. Below are useful steps to help you decide between Chapter 7 bankruptcy and Chapter 13 bankruptcy.
- First of all, you need to determine if both types are open to you. For example, if you do not qualify for Chapter 7, then Chapter 13 will be your only option. Your lawyer can help you determine if you meet specific requirements. If you qualify for both types, you will need to decide which is best for your situation. This can be determined by the questions in steps 2-4.
- Determine if you would have the necessary income to pay off your debts within 5 years. If the answer is 'yes' then Chapter 13 may be an option for you. If the answer is 'no' then Chapter 7 will probably be easiest for you.
- Determine if you have any assets that would be subject to liquidation that you would prefer to keep. If the answer is 'yes' then Chapter 13 would be your best option. If the answer is 'no' then you would have nothing to lose by filing Chapter 7.
- Determine if your monthly income qualifies you for Chapter 7. To qualify you will need to have a monthly income less than or equal to the median income in the state where you live. This monthly income will be determined by averaging the income received within the 6 months prior to your bankruptcy filing. If your monthly income surpasses your state's median, you can still qualify for Chapter 7 if you can pass a means test to prove that you do not have enough disposable income to pay a reasonable portion of your debts within 5 years.
After you have made the above determinations, your best option should be clear to you. For example, most who meet the income restrictions and have no assets that can be liquidated will be best served filing for Chapter 7. No matter what type you choose, remember to use this fresh start wisely, as you will not be eligible for this option again for several years.