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Chapter 7 or Chapter 13
Chapter 7
In a Chapter 7 Bankruptcy, all of your unsecured debt (such as credit cards or medical bills), is wiped out ("discharged"). There are a few exceptions to this, such as student loans and back taxes, but generally all unsecured debt is included.
As for secured debt, such as a car or furniture that you are still paying on, you can make the decision whether to keep ("reaffirm") the debt and keep making the payments on it, or just surrender the item to the creditor and discharge it. It is up to the creditor whether to allow you to reaffirm, but generally, as long as your payments are current at the time of filing, and you can demonstrate that you can afford the payments, the creditor will agree to let you keep the item
Chapter 13
In a Chapter 13 Bankruptcy, you make monthly payments over a 3- to 5-year period to the Chapter 13 Trustee, who is the administrator overseeing the case. The Trustee distributes the money to your creditors over the life of the bankruptcy, so that by the end of the case, all of the listed creditors have been paid off and you walk away virtually debt-free. The amount of the payment depends on how much you owe, what kind of debt you have, and how much of the debt you will be paying back.
Almost all debts can be included in a Chapter 13 Bankruptcy, including unsecured debt (such as credit cards and medical bills), car payments, other secured debt (such as furniture that is still being paid for), past due mortgage payments, and even back taxes
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Chapter 7 vs Chapter 13
Chapter 7
- Often referred to as “total bankruptcy”
- Wipes out all unsecured debt
- Does not include past due mortgage payments, back taxes or student loans
- Allows you to keep secured debt and make the regular payments, so long as the creditor agrees
- Has maximum income requirements for filing (depends on family size)
- Entire process, from filing to discharge, lasts an average of 4 months
- Cost of filing depends on complexity of case; includes filing fee and attorney fee
Chapter 13
- Allows you to consolidate and restructure your debt
- Pays both secured and unsecured debt (size of payment depends on how much is owed)
- Can include past due mortgage payments and back taxes
- Does not include student loans
- Potentially allows you to pay back as little as 1% of your unsecured debt
- Monthly payment includes attorney fee; filing fee is paid upfront (the court will allow a filing fee to be paid in three installments, in certain cases)
- Length of bankruptcy is 3-5 years
- Good choice for people who have past due payments on mortgages, cars and other secured debt; people who have excess income; or people with a lot of equity in property