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Choosing between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Mar 3, 2023 | Bankruptcy

Reaching the point where someone realizes that they could benefit from filing for personal bankruptcy can be a struggle. People often delay making that choice because they sincerely hope to regain control over their debt without judicial intervention. However, many people with medical debt or high balances on their credit cards eventually opt to file for personal bankruptcy as a means of discharging those obligations and eliminating some of their financial stress.

The kinds of benefits that someone can derive from filing for bankruptcy largely depend on the type of bankruptcy that they choose to file. Once someone has committed to the idea of filing for bankruptcy, how should they choose between Chapter 7 and Chapter 13 relief?

They look at their assets and income

Some people don’t really have a choice between Chapter 7 and Chapter 13 bankruptcy because they do not qualify for Chapter 7 protection. People who are planning to file can establish whether or not they qualify for Chapter 7 bankruptcy by completing a means test.

When completing a means test, a potential filer will compare their adjusted income to the median income for their household size based on state and federal income data. Those under the limit can file for Chapter 7 bankruptcy, but those who are over the threshold can only qualify for Chapter 13 proceedings.

The property that someone owns will also influence whether Chapter 7 bankruptcy is the right choice or not. There are liquidation risks in Chapter 7 filings that can leave home equity and other valuable assets vulnerable to sale by the trustee assigned to their case. The more property that someone has, the more they may have to liquidate before the courts will grant them a discharge.

Chapter 13 bankruptcy can be an excellent option for those who earn a decent living, who are at risk of foreclosure and/or could benefit from making more manageable repayments of their debt obligations. Of course, the downside of Chapter 13 bankruptcy is that it takes several years to achieve discharge and a successful closure of one’s case.

It can be hard for an individual to determine whether they qualify for Chapter 7 bankruptcy, let alone decide on the best choice given the complexities of their circumstances. Securing professional help early in the bankruptcy process can benefit those who are hoping to protect their property and minimize their losses.