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Those who are having trouble repaying their debts may opt to file for either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy involves liquidating all non-exempt property and using the funds to repay creditors. Chapter 13 is a way for wage earners to reorganize existing debt to be repaid over three or five years.
Generally speaking, most debtors prefer to file for Chapter 7 over Chapter 13 because it tends to be easier and because it eliminates most unsecured debt. However, Chapter 13 is a good option for those who do not qualify for Chapter 7.
If you are filing for bankruptcy, your first instinct may be to have your debts discharged as soon as possible. However, there are many reasons why you would want to have debt reorganized as opposed to having it discharged outright.
You Want to Keep Your Property
Let's say that you have a home that is in foreclosure or a car that you don't want repossessed because you have a lot of equity in it. Filing for Chapter 13 bankruptcy allows you to keep your car while you negotiate with your mortgage lender to refinance your loan and avoid losing your house. In some cases, a Chapter 13 filing may strip junior liens, which means you could keep your house while converting other secured debts to unsecured debts. Once converted, they can be renegotiated or simply discharged.
You Have Debts That Cannot Be Discharged
Not all debts can be discharged through bankruptcy. For instance, if you have tax debt or child support obligations, they will not go away through bankruptcy. The same is true if you put nondischargeable debt, such as a tax bill or a student loan, on a credit card. In this case, reorganizing the debt through Chapter 13 may make it easier to repay.
You Don't Qualify for Chapter 7 Bankruptcy
Chapter 13 may be an option if you don't qualify for Chapter 7 bankruptcy. For instance, you may not pass the means test, or you have may have had a Chapter 7 case dismissed in the last 180 days. If you have filed for Chapter 7 in the past eight years, you may also be ineligible to file again.
You Want to Repay Your Debts or Have a Co-Debtor
There are times when you want to repay your debt because you feel like it is the right thing to do. In some cases, repaying your debt may help your credit score, help you retain property throughout the bankruptcy process or simply provide you with more leverage as you seek to renegotiate current loan terms.
Just as there are good reasons to file for Chapter 13 bankruptcy, there are many reasons why filing for Chapter 7 may be in your best interest. Depending on the facts of your case, it may be possible to have debts discharged in as little as 60 days.
Your Debts Are Mostly Eligible for Discharge
If you have mostly credit card or medical debt that you can no longer pay, Chapter 7 bankruptcy is usually the most helpful in getting rid of it quickly. You may also be able to discharge payday loan or personal loan debt as well. As a general rule, if the debt is unsecured, it can in most cases be eliminated through a liquidation bankruptcy.
You Are Looking to Get Rid of Debt Quickly or You Are Unable to Repay With a Payment Plan
In a Chapter 7 case, you may be able to discharge your debt without paying anything in a matter of weeks. As they are generally exempt, you may be able to keep your IRA or 401(k) even after your case is finalized. For those who are unable to pay creditors, getting a quick discharge is critical as all contact and collection efforts must generally stop unless you reaffirm your commitment to pay a particular debt.
Filing bankruptcy may enable a debtor to get a fresh financial start. However, prior to filing, it might be worthwhile to talk with a bankruptcy lawyer who may be able to explain the differences between Chapter 7 and Chapter 13 bankruptcy and which options are available to you.
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified chapter 13 bankruptcy lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local chapter 13 bankruptcy attorney to discuss your specific legal situation.