Chapter 7 or Chapter 13
Most people filing bankruptcy will want to file under either Chapter 7 or Chapter 13. Either type of case may be filed individually or by a married couple filing jointly.
Chapter 7 ("Straight Bankruptcy")
In a bankruptcy case under Chapter 7, you file a petition asking the court to discharge your debts. A Chapter 7 bankruptcy will wipe out (discharge) your debts, while paying to your creditors the value of any non-exempt property your may own. (For information on exemptions see Protect your property.) In the vast majority of cases, all of your property will be exempt. But property which is not exempt will be sold, with the money distributed to creditors whose debts are being discharged by the Court. For more information see How Chapter 7 Works.
If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. Chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take the property if you are behind on the payments.
Chapter 13 ("Reorganization")
In a Chapter 13 case you file a “plan” showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a Chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which you might otherwise lose, if you can pay the monthly amount the Court decides is fair. In many cases, these payments will be the sum of:
- your normal monthly mortgage payment,
- some amount calculated to catch you up if you are behind on mortgage payments, and
- an amount calculated to pay a (usually small) portion of your other debts.
You should consider filing a Chapter 13 plan if you:
- own your home but are in danger of losing it in foreclosure;
- are behind on debt payments, but can catch up if given some time; or
- need to protect valuable property which is not exempt, but you can afford to pay creditors from your income over time.
For a Chapter 13 filing to be accepted by the Court, you will need to show enough income to pay for your normal monthly necessities and to keep up with required payments as they come due. For more information see How Chapter 13 Works.
How to Decide
Determining which chapter is best for you is a discussion/analysis for you and your attorney. In broad strokes, it comes down to three concerns:
- Your goals—whether you want to hold on to property that secures a loan on which you are behind, or you want to simply be rid of debts and get a fresh start;
- How much equity you have in the property you own; and
- An analysis of your income and expenses, called the Means Test.
For answers to other questions you may have, feel free to visit the other pages listed under the "About bankruptcy" link. It's found at the top of every page on our site.
