Which chapter bankruptcy is right for me?

Although the bankruptcy code offers several chapters (or types) of bankruptcy, most individuals and families must choose between only two chapters: Chapter 7 and Chapter 13.

A Chapter 7 bankruptcy (also called a “liquidation”) is the simplest and quickest way to obtain a fresh start, and it is the chapter most frequently used.

Technically, in a Chapter 7 bankruptcy, the debtor’s assets become property of a trustee who is charged with selling them so that the proceeds can be distributed to the debtor’s creditors. In practice, however, most debtors do not lose any of their property. This is because of many important exemptions which are available to protect your property.

While there are limitations to these exemptions, most individuals filing bankruptcy are able to keep all of their property while reducing or eliminating their debt. You should note, however, that certain debts such as child support, alimony, certain income taxes, and most student loans are not affected by bankruptcy.

A Chapter 13 bankruptcy (also called a “wage-earner plan” or a “reorganization”) is generally used for individuals with a consistent income who have property that would not be exempt in a Chapter 7, or for people who are behind on mortgage or car payments. Chapter 13 can also be used to help individuals with debts which cannot be discharged in Chapter 7. Under the Chapter 13 reorganization plan, the debtor makes monthly payments over 3 to 5 years to a Trustee, who distributes the money to the creditors according to the reorganization plan.

The amount and duration of the Chapter 13 plan is based on the debtor’s monthly income and expenses, the amount of their debt, and the value of their property. Depending on these factors, consumers who qualify will pay back either part or all of their debts. As long as Chapter 13 debtors stay current on their reorganization plan and other obligations, they are able to keep their property.

Although both Chapter 7 and Chapter 13 bankruptcy filings will stop creditor harassment, lawsuits, and wage garnishments, Chapter 13 is particularly helpful in stopping foreclosure of a home or repossession of a vehicle.   Debtors can use the Chapter 13 process to catch up on their payment arrears and hold onto a home or car.