Falling into a financial pitfall is nothing to be embarrassed about. It happens to the best of us and people who were careful and certain of their financial stability for the entirety of their lives. Bankruptcy is an incredibly useful legal tool that can act as a saving grace for people who are slammed with overwhelming debt and financial obligations they simply cannot pay back.
However, bankruptcy is only effective when it is used properly and filed correctly. The first question you are going to come across on your path to a successful bankruptcy filing is often the most difficult: should you file for Chapter 7 or Chapter 13 bankruptcy?
Chapter 7 Benefits & Disadvantages
When most people envision a bankruptcy filing, Hollywood movies and television news stories probably make them think of someone losing everything in their house – and then their home, too. This is an exaggerated, dramatic, and a rare-in-reality interpretation of Chapter 7 bankruptcy, which seeks to dismiss as much of your debt as possible but while also risking the loss of your property in exchange.
With this in mind, the key benefit of Chapter 7 bankruptcy is that it does have the potential of dismissing huge portions of your debt, right up to its entirety. The downsides are varied, though. To have debt discharged, some of your property can be used as collateral if it does not qualify for protection in bankruptcy, or if they are nonexempt. Depending on what you own and how much you owe to debtors, you could potentially lose some important pieces of property, like your home and/or automobile.
Additionally, Chapter 7 bankruptcy is subject to federal bankruptcy law restrictions that may make it difficult to qualify for its benefits. Namely, you must pass a “means test” that compares your average income compared to that of the average household in your state. If you make more than most other people in your state in a given fiscal year, then you probably cannot use Chapter 7 bankruptcy.
Chapter 13 Benefits & Disadvantages
Many bankruptcy attorneys see Chapter 13 bankruptcy as a “friendlier” form of bankruptcy in comparison to Chapter 7 because it tends to be kinder to the bankruptcy filer and debtors alike. Chapter 13 is also regularly called “reorganization bankruptcy” since it reorganizes debt instead of just attempting to erase it.
Reorganizing your bankruptcy involves:
- Making minor to moderate reductions in owed debts or taxes.
- Creating a new repayment schedule lasting three, four, or five years.
- Discharging what remains once the repayment schedule ends.
If you do get the chance to reorganize your debt with Chapter 13 bankruptcy, you must make an honest effort to try to make all payments according to the new schedule. Creditors can cry foul to the bankruptcy court if it seems you are being irresponsible with your money after filing for Chapter 13. The court may rule you have not made an honest effort and reinstate the debts you owed previously, undoing your hard work.
Since you do not clear out all or possibly even most of your debt with Chapter 13 bankruptcy, you might need to give up less or none of your nonexempt property – not upfront. Failing to make a real effort to meet your repayment schedule could lead to the removal of your nonexempt property. Lastly, there is no means test you must pass to file for Chapter 13.
Final Choice: Chapter 7 or 13?
With all of this information, you are probably still understandably hesitant to commit to Chapter 7 or Chapter 13. There are many variables to weigh, and twice as many regulations and legalities that can influence your filing. Thankfully, you do not need to make this decision alone.
Come to Leffler Renfroe and talk to our Memphis bankruptcy attorneys about your situation. Together, we can guide you confidently through the bankruptcy filing that works best for you by minimizing the most debt while also risking the least amount of your property. There might even be a bankruptcy alternative we can suggest you have not yet realized.
A better financial future lies ahead. Contact our firm for a free initial consultation.