Chapter 7 versus Chapter 13 Bankruptcy
While there are many bankruptcy chapters, or types of bankruptcy, that one can file, the two most common are Chapter 7 and Chapter 13. These are also the two chapters that relate the most to individuals or families attempting to relieve their debt burden in some way.
Chapter 7 Bankruptcy
In general, a Chapter 7 bankruptcy operates a complete discharge of the debtor's debts, often allowing the individual to start over financially. A Chapter 7 bankruptcy requires the debtor to file a Petition for Bankruptcy, which provides significant details as to all aspects of the debtor's finances. Full disclosure is vital and required, so this paperwork can be complicated if done without the advice of an attorney. Once the Chapter 7 paperwork is filed and approved, the debtor's debts are "discharged," or erased and removed from future obligation.
When to File for Chapter 7
A Chapter 7 bankruptcy is often helpful to those individuals or families who have recently become unemployed, suffered a catastrophe, found themselves ill, or lost a loved one, leaving them with more debts than they can handle. This can be especially helpful to those individuals who find themselves struggling to make any progress in paying down their debts and are in need of a "fresh start."
In general, a Chapter 13 bankruptcy typically operates like a restructuring of the debtor's debts, rather than a complete discharge. This is done by filing much of the same paperwork and placing the debtor/s into a "bankruptcy plan," which allows the debtor to make payments towards their debts in an amount that relates to their income and expenses. If a Chapter 13 plan is successfully completed, the debtor receives a discharge, similar to the one in Chapter 7, but with a broader scope.
When to File for Chapter 13
A Chapter 13 bankruptcy is often utilized when an individual debtor has a consistent income to contribute to the payment of debts, but their debts are too high or complex to pay on their own. This chapter also provides the advantage of maintaining ownership of certain assets, like real estate, by incorporating delinquent payments into the Chapter 13 bankruptcy plan and allowing the debtor to catch-up on the delinquency. On the other hand, Chapter 13 bankruptcy is a lengthy commitment, often 3 - 5 years, and requires that the payment plan be strictly followed in order to obtain discharge. This can often be difficult for individuals or families who find themselves unable to keep up with the payments for whatever reason and are forced to dismiss or convert into a Chapter 7 bankruptcy anyway.
Consequences of Bankruptcy
Both a Chapter 7 and Chapter 13 bankruptcy can be a useful tool in helping an individual or family overcome financial obstacles and start over with a clear budget and a clean slate. Both Chapters, however, have a negative impact on your credit score and future ability to obtain financing. The issues surrounding bankruptcy are involved and complex and each individual set of circumstances is unique.