File Chapter 7 Bankruptcy or file Chapter 13 Bankruptcy? The choices, oh my! Seriously, though, if you’re considering filing for bankruptcy, you have two different types to choose from, with different pros and cons to each type, and a slightly different process for each type.
So, before you decide to file for bankruptcy and start the process, first, take a moment to figure out all of the details. It’s truly the best way to decide which option is the right one for you.
Types of Bankruptcy
The two types of bankruptcy for consumers are Chapter 7 or Chapter 13:
Filing for Chapter 7 bankruptcy is akin to wiping your financial slate clean. It’s like a fresh start – a way to start over in the financial department.
When you file for Chapter 7 Bankruptcy, all of your debts are discharged or extinguished, except any mortgages you have or any of your federal debts. So, if you owe on a home or you owe the feds, then those debts stay with you, but you can ditch the rest of your debts.
What happens is when you file for Chapter 7 Bankruptcy, the companies, lenders, and financiers that hold these debts write the debts off. While it is a loss for these companies, it is no longer an obligation for you, so you are not responsible for paying back the loan or debt (unless it falls under one of the previously mentioned debt categories).
That’s the good news. Now, for the bad news.
Filing for a Chapter 7 bankruptcy can really put a damper on your credit and your credit score. Once you file for bankruptcy, it shows up on your credit report. AND there it sits for up to the next 10 years.
That’s right, every time you go to apply for new credit or any time someone takes a peek at your credit report, the bankruptcy is going to appear as a blemish on your credit.
The great news (Yup, there is some of that here, too.) is that you do have the opportunity to rebuild your credit after filing for Chapter 7 Bankruptcy. Start out rebuilding your credit by always paying your bills and always paying your bills on time from this day forward.
Little by little, start to apply for new credit. Even though the bankruptcy remains on your credit report, it is possible to open new credit accounts one at a time, responsibly use those accounts, and rebuild your credit.
Eventually, the bankruptcy (usually after 10 years) drops off your credit report and if you’ve played your financial cards right, your financial situation can return to normal.
While filing for Chapter 7 Bankruptcy essentially gets rid of your debts, Chapter 13 Bankruptcy is different. When you file for Chapter 13 Bankruptcy, lenders, financers, and companies do not write off or get rid of your debt.
Instead, they work on restructuring the debt you so you can pay it off.
When you file for Chapter 13 Bankruptcy, the bankruptcy court works with the companies to restructure your debt and creates a payment plan that you can afford to make. This means that the original terms and conditions of the debt are renegotiated so you end up with new terms and conditions, including a new interest rate, term to repay it, and payment amounts.
Generally, the repayment period of your debt falls between three and five years, which means that the debt has to be paid off at the end of the agreed upon period.
A Chapter 13 Bankruptcy shows on your credit report just like a Chapter 7 does. The difference is that it can be seen as less of a blemish because your debt still exists and you’re still repaying on it. It can make you look like more of responsible debtor than someone who files for Chapter 7 Bankruptcy.
Making the Choice
All this information may leave you scratching your head figuring out which option is the right one for you. Of course, everyone’s personal financial situation is different, so which option is the most beneficial to you depends on your situation and the outcome you want.
Who Benefits from a Chapter 7 Filing
Let’s say you’re out of work. You’ve been searching for a new job for months now and you can’t seem to catch a break. You have no income coming in and you don’t see any income coming in the foreseeable future either.
In a situation like this, wiping your debt clean by filing for Chapter 7 Bankruptcy is likely the most beneficial option for you.
Who Benefits from a Chapter 13 Filing?
On the flip side, let’s say that you do have regular income. Maybe you work and your spouse works, so you have money coming in on a regular basis, but it’s just not enough to cover the mound of debt you have managed to accrue.
Filing for Chapter 13 Bankruptcy is likely the most beneficial option. Since you do have a regular income, you can take responsibility for repaying your debt, you just need to reduce the amount of debt you have so you can afford to make the monthly payments on it.
Filing for Bankruptcy
You have a couple of different options when filing for bankruptcy. Your first option is to hire and work with a bankruptcy attorney. The attorney would handle the entire process for you, which is largely administrative. He or she would also provide you with legal advice and guidance as to which filing would be best for you, etc.
If you’re filing for Chapter 7, you usually do not have to appear in court at all. Some Chapter 13 filers have to appear in bankruptcy court before the judge.
The other option is to file directly with your local bankruptcy court. You can obtain the bankruptcy forms directly from the U.S. Bankruptcy Court website, but check with your local bankruptcy court for any additional forms that they may require. If you decide to go this route, non-attorney petition preparers associated with the court can help you prepare the forms.
The preparers are not allowed, however, to give you any legal advice.
Again, filing for bankruptcy is primarily filling out and filing a bunch of different legal paperwork, so it comes down to whether or not you want some legal advice and guidance and an attorney to handle everything for you or whether you’re willing to take it all on yourself.
Have you ever filed for bankruptcy? What happened? Share your experience with our readers below!
I have a lot of debt with hospital bills and credit. My income is half of what it used to be as I went through divorce. I think I am going to have to do Chapter 7. The debt is overwhelming and stressful! I can file on my own? And does it cost anything to file? I talked to a lawyer once and it could cost up to $1500.
I need to clean my credit up
How much is it to file bankruptcy?
I would like to file to start over