In the U.S., there are two main bankruptcy (BK) options for individuals: Chapter 7 or Chapter 13. Picking the right bankruptcy for you can depend on multiple factors, including income, debts, assets and financial goals. So, what’s the difference between the two, and which is correct for your situation?

Chapter 7

couple meeting with financial adviserA Chapter 7 BK is called a liquidation bankruptcy because you wipe out all (or most) of your debts, such as credit cards and medical bills. A trustee is assigned to administer your BK case, and they can sell non-exempt property (property that state or federal BK law says is not protected, such as a newer model vehicle with equity) to pay back your creditors.

If the debt involves your car (collateral), BK filers are given three options:

  1. Redemption - Pay the current value of the vehicle in one cash payment. With this, you get your vehicle back.
  2. Reaffirmation - Agree to continue a debt after the BK is completed.
  3. Surrender - Give up all rights of the vehicle to the creditor, who can sell the vehicle to recover any debt.

In order to qualify for Chapter 7 BK, you must have little to no disposable income, and to receive a discharge, it will typically take three to five months.

Chapter 13

The next option is a Chapter 13 BK, which is a reorganization BK for people with a regular income who can pay back a portion of their debts through a repayment plan. This BK will last either three or five years depending on the filer’s income compared to the state median. In this BK, you agree to three things:

  1. Make the plan payments
  2. Don’t bring more debt onto yourself without court approval
  3. Keep insurance on your car

Different from a Chapter 7 BK, you get to keep all of your property in a Chapter 13 BK in exchange for paying back all or a portion of your debts. A Chapter 13 is more appealing because you are more than likely to keep your car.

Bottom Line

Choosing the right bankruptcy is important. Make sure you understand the difference between a Chapter 7 and Chapter 13 and which one will work best for you.

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