Most individuals considering bankruptcy choose between two options. Some people pursue Chapter 7 bankruptcy. They can complete the process in a matter of months. They can discharge eligible debts without any protracted efforts to pay down what they owe. Some people choose Chapter 13 bankruptcy instead. In a Chapter 13 filing, a multi-year repayment plan is necessary.
What circumstances typically make a Chapter 13 bankruptcy the better option?
Income above the state median
To qualify for Chapter 7 bankruptcy, filers must pass a means test. They adjust their income and compare it to the state median for their household size. Filers who do not pass the means test do not have the option of filing a Chapter 7 bankruptcy, typically making Chapter 13 proceedings the best form of relief available.
Prior economic success
The need to file for bankruptcy can develop rapidly after a medical emergency or job loss. People who previously enjoyed professional success may want to consider a Chapter 13 filing instead of a Chapter 7 bankruptcy. Chapter 13 proceedings do not require any asset liquidation, allowing filers to preserve business holdings, home equity and other valuable resources that they might need to liquidate in a Chapter 7 bankruptcy case.
Additionally, some people opt for Chapter 13 proceedings when they hope to maintain a positive dynamic with their creditors. By making years of payments to reduce the discharged balance, they can theoretically maintain goodwill with those creditors instead of risking future opportunities with a sudden and total discharge in a Chapter 7 filing.
Exploring the benefits and drawbacks of both types of personal bankruptcy can help people make informed choices. The selection of a particular type of bankruptcy has a profound impact on a filer’s future, and they may need guidance to make the best decision given their unique circumstances. Seeking personalized legal guidance is a great way to get started.