It can be difficult to come to terms with the need to file for bankruptcy but the personal bankruptcy process can provide those in financial distress with a way to erase their overwhelming debts and start fresh with a clean financial slate. When filing for personal bankruptcy in the U.S. it is common to do so under either Chapter 7 or 13 of the U.S. Bankruptcy Code. When faced with the daunting prospect of having to declare bankruptcy, deciding on which chapter to file under can be difficult as both have their own advantages and disadvantages. Your eligibility based on your financial situation will play a deciding role in the choice.

Description of Bankruptcy Chapter 7 vs. Chapter 13

Chapter 7 is known as the traditional liquidation form of bankruptcy where a court-appointed trustee is in charge of selling off your assets in order to pay off creditors, while Chapter 13 consists of a repayment plan that takes place over a period of 3-5 years. The benefits of bankruptcy Chapter 7 verses Chapter 13 depend solely on your individual financial situation and it is important to speak to a qualified bankruptcy attorney to ensure that you fully understand the process and the consequences of each prior to filing the initial petition.

Requirements of Bankruptcy Chapter 7 vs. Chapter 13

Although you may feel that it is just a matter of you deciding which chapter of the U.S. Bankruptcy Code you would like to file under based on which is most advantageous in your situation, this is not actually the case. Chapter 7 is a good option for those with a lot of dischargeable debt and little to no disposable income. On the other hand, eligibility to file under Chapter 13 is determined by a Means Test to demonstrate that you have sufficient disposable income to complete the repayment plan satisfactory to the judge’s order. In addition, your unsecured debts must total less than $360,475 and secure debts less than $1,081,400.

Process of Bankruptcy Chapter 7 vs. Chapter 13

When analyzing the actually process of filing bankruptcy Chapter 7 verses Chapter 13, they can both be relatively straightforward, depending on the type of assets you own, the amount and type of debt you have, and whether there is any opposition from your creditors. In general a Chapter 7 filing can take as little as 4 months whereas a Chapter 13 filing can take anywhere from 3-5 years. In both cases you should book consultations with a few qualified bankruptcy attorneys in your area who will explain the process and give you give you invaluable advice. Once you have decided to file the bankruptcy petition, you will need to take a pre-filing credit counseling course either online, in person, or over the phone in order to discuss your options and review details of the bankruptcy process. After that it is simply a matter of submitting all the paperwork and paying the filing fees. If you are filing under Chapter 13 you will also need to submit your repayment plan and wait for approval by the court as well as your creditors. Usually there are no problems but occasionally creditors can object and a hearing will be scheduled to resolve any issues, amend the plan, or come up with another alternative. A Chapter 7 filing simply involves a 241 Meeting of Creditors which only lasts a few minutes but allows creditors the chance to object to your bankruptcy. If no issues are raised, your discharge should occur about 60 days afterward and at that point your bankruptcy is finalized. For a Chapter 13 filing, your bankruptcy will be finalized once your repayment plan is completed.

Advantages of Bankruptcy Chapter 7 vs. Chapter 13

Depending on your situation, you may feel that filing for bankruptcy under Chapter 7 is the better option as eligible debts are discharged quickly and easily. After about 6 months your bankruptcy will be finalized and you will be able to start rebuilding your credit; however, a Chapter 13 bankruptcy only remains on your record for 7 years and discharges slightly more debts. Both of them offer relief from creditors and collection agencies, as well as the chance at a fresh financial start.

Consequences of Bankruptcy Chapter 7 vs. Chapter 13

The main consequence of declaring personal bankruptcy is the effect that it will have on your credit score. A drop of a couple hundred points can make it difficult for you to qualify for a loan, secure a mortgage, or purchase big ticket items on a credit card. A Chapter 7 bankruptcy will remain on your record for 10 years whereas a Chapter 13 filing will only remain on your credit report for 7 years. This is due to the fact that the planned schedule of repayment that must be followed ensures that creditors will receive at least a portion of the money owed to them.

Filing bankruptcy under either Chapter 7 or Chapter 13 will be beneficial if you are in dire financial straits, and if you are unsure as to which would best solve your financial difficulties, it would be best to consult a qualified bankruptcy attorney. They will be able to explain not only the process involved in filing bankruptcy, but also the pros and cons of each Chapter.

To find out if the personal bankruptcy process is right for you, please consider filling out our free bankruptcy evaluation.