When New Yorkers are thinking about finally addressing their financial struggles through bankruptcy, they may be unsure of which chapter is better for their circumstances. The two types of personal bankruptcy for individual debtors are Chapter 7 and Chapter 13. Each has its own benefits and drawbacks.
Since every case has its own factors to consider, it is important to look at both Chapter 7 and Chapter 13 in that context and make an informed decision. It is also useful to have experienced help when moving forward.
Chapter 7 is a liquidation; Chapter 13 is a repayment plan
Property and objectives generally determine whether a debtor should file under Chapter 7 or Chapter 13. For people who do not own a home, do not have a newer automobile and are not facing the prospect of losing various items through a Chapter 7 liquidation, it may be the better avenue.
Through Chapter 7, unsecured debt like credit cards will be cleared as part of the discharge. So too will medical debt. If the person does own property, it will need to be surrendered to a trustee, liquidated and the creditors will be repaid through the proceeds.
For a person who owns a home but is behind on their mortgage payments, and who owns automobiles and other properties they want to retain, Chapter 13 is likely a better solution. Through Chapter 13, payments are made to a trustee over three or five years. It is like a consolidation loan.
Those who have a steady job and regular income are better suited to Chapter 13 as they can make the payments. The monthly payment will likely be less than they were paying to stay one step ahead of creditors each month. The key with Chapter 13 is that while the debtor is making the payments on time and in full to the trustee, they can keep their property.
Having professional advice can help with deciding on Chapter 7 or Chapter 13
Chapter 7 is generally easier as it is completed relatively quickly. Chapter 13 takes more time, but it does let people keep property they would otherwise lose in a Chapter 7 liquidation.
This is a broad-based explanation of how Chapter 7 and Chapter 13 work. Other aspects must be considered such as the means test, credit counseling and how long it takes to complete the bankruptcy and receive the desired discharge. For help from the start and throughout the case, having advice on bankruptcy and the debt relief it can bring is essential to understanding the details of both chapters.