If you’ve decided to file for bankruptcy, you’ll very likely choose between Chapter 7 and Chapter 13. While there are advantages to both, it’s important to understand how they’re different so you can determine which one works best for your situation. These are the two most common forms of bankruptcy for both individuals and small businesses.

Before making a decision, it’s important to consider contacting an experienced bankruptcy attorney in your state, since the attorney can review your case and help you determine what path forward is going to work best for your situation. 

What are the Differences Between Chapters 7 and 13 Bankruptcy?

Chapter 13 bankruptcy eliminates your debts but does so through a repayment plan. By filing for Chapter 13, you agree to pay back a portion of your debt over a period of time, usually between three and five years.

Chapter 7 bankruptcy doesn’t establish a repayment plan after eliminating your debts. However, you will be required to sell non-exempt assets to pay back your creditors.

It’s also important to note that Chapter 7 and Chapter 13 bankruptcies both impact your credit, and it’s possible that not all of your debts will get wiped out.

Chapter 7 bankruptcy is the most common filing, and it’s the fastest. When you file for Chapter 7, all collection actions against you immediately cease. This bankruptcy filing will eliminate most of your unsecured debts, such as credit card debts and personal loans. But it also means selling off some of your assets to help pay off some of your debts. Chapter 7 is also used by businesses that have assets that can be liquidated to help pay what’s owed to creditors. In both instances, some of your assets will be exempt from the sale, such as your car, household items, and pension, while other items are not.

But there are instances when Chapter 13 is the better option.

When is Chapter 13 Bankruptcy Better than Chapter 7?

Not everyone qualifies to file for Chapter 7 bankruptcy. Chapter 7 works best for people who don’t own much property, have a family income that doesn’t exceed the state median, and are mainly struggling with credit card debt, medical bills, and personal loans. It’s not the best choice for everyone. Higher-income filers may not qualify, and it’s also not a good option for those facing foreclosure or repossession.

Chapter 13 bankruptcy is more advantageous than filing for Chapter 7 bankruptcy for those who:

  • Are behind on a mortgage or car loan, since Chapter 13 allows you to make up those missed payments over time.
  • Have a tax obligation or debt you can’t discharge in Chapter 7, since your repayment plan will give you three to five years to repay them.

In Chapter 13, you fill out a Calculation of Your Disposable Income form. After deducting expenses, what’s left is your disposable income. That’s what you agree to pay your credits each month over the course of the repayment plan. 

Some people who file for Chapter 13 bankruptcy don’t complete their repayment plans, running the risk that their debts won’t get discharged; but overall, Chapter 13 bankruptcy is a good option for people who have a regular income and might otherwise lose their house to foreclosure. If you need time to pay overdue bills, this plan will be more suitable.

However, every bankruptcy case is different. That’s why it’s always important to consult with a knowledgeable bankruptcy attorney first.

Trusted Northeastern Louisiana Bankruptcy Lawyers

If you’re contemplating different options for filing business bankruptcy, call the trusted and knowledgeable attorneys at E. Orum Young Law Offices. With more than 35 years of experience, they understand the complexities of filing for bankruptcy and can help ensure you’re on the best course to financial freedom. They’re proud to have filed more bankruptcy cases than any other law firm in Northeast Louisiana and can help you too. Call 318-450-3192 for a free case review or contact them online today.