Chapter 7 vs Chapter 13: An introspective comparison

Will filing a Chapter 13 bankruptcy make better sense than Chapter 7?

Do you have to file a bankruptcy in order to take your financial situation under control? You might be in a dilemma to choose between Chapter 7 and Chapter 13. Go through this article to know why filing a Chapter 13 bankruptcy might be a better option for you than filing a Chapter 7 bankruptcy.

When you can’t file Chapter 7 and Chapter 13 is the only option?

There is no option to decide and you have to file a Chapter 13 bankruptcy to be debt free, when you aren’t eligible to file Chapter 7. You have to qualify the Means Test in order to file a Chapter 7 bankruptcy. If you can’t meet up the eligibility requirements, then you’re not eligible to file Chapter 7.

Should you still file Chapter 13 even if you qualify for Chapter 7?

Even if you qualify for filing Chapter 7, filing a Chapter 13 bankruptcy sometimes make better sense, under the following situations.

  • You sincerely wish to repay your debts – If you sincerely wish to repay your debts but under a bankruptcy protection, then you should file Chapter 13 bankruptcy.
  • You want to keep your nonexempt property – When you file a Chapter 7 bankruptcy, you usually can’t keep your nonexempt properties, if any. These properties are sold by the bankruptcy trustee and the proceeds are distributed amongst your creditors. However, in Chapter 13, you don’t have to give your nonexempt properties, because you repay debts from your income. So, Chapter 13 is a better alternative for you over Chapter 7, if you have and want to keep your nonexempt property.
  • You have a debt which can’t be discharged under Chapter 7 – If you have student loan debt, tax obligation, etc., it can’t be discharged under Chapter 7 bankruptcy. In this case, you can file a Chapter 13 and repay the amount over a certain time period.
  • You’ve been delinquent on your mortgage and car loan – You want to reinstate the original agreement and make up the missed payments over time. You can do this only in a Chapter 13 bankruptcy.
  • You don’t want your creditors to go after your co-signer – It is obvious that your creditors will go after your co-signer if you file a Chapter 7 bankruptcy. However, if you don’t want this to happen, you can file a Chapter 13 bankruptcy and make the required payments.

What are the eligibility criteria to file a Chapter 13 bankruptcy?

You need to qualify the following eligibility criteria in order to file a Chapter 13 bankruptcy.

  • Sufficient disposable income – You need to show to the bankruptcy court that you’d have enough income after subtracting your allowed expenses and secured debt payments.
  • Amount of outstanding debt – Your secured debts shouldn’t exceed $1,149,525 (Adjustment till April 1, 2016) and unsecured debts should be within $383,175 (Adjustment till April 1 , 2016), to file a Chapter 13 bankruptcy.
  • Previous bankruptcy filing – You cannot file a Chapter 13 bankruptcy if your debts have been discharged under Chapter 7 bankruptcy within last 4 years or under Chapter 13 bankruptcy within last 2 years of time. You also cannot file a Chapter 13 bankruptcy if your prior bankruptcy petition has been dismissed in past 180 days.
  • Credit counseling requirement – You need to show a certificate of proof of an approved credit counseling agency that you had attended a counseling session at least 180 days prior to filing the Chapter 13 bankruptcy.
  • Income tax filing status – You should be current on your income tax filing and need to show your income tax returns for past 4 years of bankruptcy filing date.

Is there any disadvantage to file a Chapter 13 bankruptcy?

There are always some disadvantages attached to filing a bankruptcy and Chapter 13 is not an exception. However, sometimes, the advantages may outnumber the disadvantages. But, you should be aware of the cons which are given below.

  • The Chapter 13 bankruptcy will stay in your credit reports for up to 10 years
  • It will become harder for you to declare Chapter 7 bankruptcy later
  • It can take up to 5 years to repay debts under Chapter 13 bankruptcy
  • You’ll have to wait for 1-3 years of bankruptcy filing to obtain a credit card and that too at a relatively higher interest rate
However, in spite of few disadvantages, bankruptcy will still help you make a fresh start to your financial life. So, take this opportunity to plan your financial future effectively.
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