Which Bankruptcy Chapter Is Best For You?

Choosing bankruptcy chapters7 or 13?

Liquidate or reorganize?

Quick hit or long term fix?

Which way to go?

Goals

Start with listing your goals.  Besides getting out of debt, are you looking to save a house from foreclosure, or manage debts that can’t be discharged, like recent taxes or back support? Those goals suggest Chapter 13.

Chapter 13 allows the stripping of liens that have no economic value;  Chapter 7 has much more limited lien stripping options.

Eligibility

Have you filed bankruptcy in the past 8 years?  If you got a discharge in that case, bankruptcy law may limit your choice of chapter.

If you want to file Chapter 13, there are caps on the amount of secured and unsecured debt you can have and qualify.  There is neither a maximum or a minimum amount of debt for Chapter 7.

You must have a regular income greater than your living expenses going forward to file Chapter 13.

Assets

In Chapter 7, a trustee is appointed to gather up and reduce to cash your assets that are not protected by an exemption.  In Chapter 13, you retain possession of your assets and pay into the plan money at least equal to what creditors would have gotten in a Chapter 7 case.

Debtors with unincorporated businesses that they expect to continue to operate are usually better protected by a Chapter 13 filing.  Chapter 7 trustees may want to shut down a going business for fear of more debt or other liabilities after the filing.

Avoidable transfers

Bankruptcy law gives a Chapter 7 trustee the ability to recover payments you made on old debts or gifts or giveaways that prejudice your creditors.  By choosing Chapter 13, you can prevent avoidance actions being filed against those you care for by paying something more into the Chapter 13 plan.

Kinds of debts

Some kinds of debts are not dischargeable in Chapter 7 but can be discharged in Chapter 13.  Non support debts that come out of a divorce are the prime example.  Chapter 13 also allows payment in full on your debts that are guaranteed or cosigned by friends or family.

An experienced bankruptcy lawyer with all of the facts about your situation can walk you through the pros and cons of the alternatives.

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About the Author
 
 
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.