Which type of bankruptcy should you file?

If you are having money problems, you may have already decided to file bankruptcy to deal with your debts. Having researched this option, you may be aware that there are two types of bankruptcy-Chapter 7 and Chapter 13. However, you may not be sure which type would best fit your situation. It is helpful to know a little about each type before making this decision.

Chapter 7

For most individual filers, Chapter 7 is the best option, as it offers a fast discharge of most types of debts, including credit cards and medical bills. Most filers obtain relief from their debts in as few as three months.

However, Chapter 7 is not without its drawbacks, as it involves a liquidation sale of the filer's assets to pay their debts. Fortunately, most important property is exempt from being sold by New Jersey of federal law. As a result, most filers of Chapter 7 lose little or no property.

Due to the liquidation sale, Chapter 7 is ideal for those owning few assets that are not exempt from the sale. However, as it requires filers to pass a means test before obtaining a discharge from their debts, Chapter 7 is generally not the best fit for those with significant amounts of disposable income.

Chapter 13

For filers with significant disposable income or those owning assets that would be lost in the liquidation sale, Chapter 13 is likely the better choice. During Chapter 13, there is no sale of assets, so filers keep all of their property throughout the process. In lieu of a sale, filers make monthly installment payments towards some of their debts over a three to five-year period. At the end of the period, any debts not paid in full under the payment plan (which usually involve most unsecured debts) are discharged.

Chapter 13 is especially useful for those facing foreclosure, as the payment period gives filers 3-5 years to catch up with their missed mortgage payments. While the overdue mortgage debt is being repaid, lenders may not foreclose on the house. At the end of Chapter 13, filers have caught up on their mortgages and resume making their normal pre-bankruptcy payments towards it.

In addition, Chapter 13 is also helpful for filers needing time to pay off debts that are non-dischargeable in bankruptcy, such as alimony, taxes, child support or student loans. Since the overdue portion of these debts are paid off over three to five years, Chapter 13 makes catching up on these debts easier.

Although Chapter 13 may seem like a good choice, it is not for everyone, as it requires filers to have a regular income in order to be eligible.

Get help with deciding

Although the choice between Chapter 7 and Chapter 13 may seem straightforward, in reality, it requires a consideration of very complex issues. Since filing the wrong type of bankruptcy can potentially derail your ability to successfully obtain relief from your debts, it is important to seek the advice of an experienced bankruptcy attorney before venturing further.