Chapter 7 vs Chapter 13
There are two types of bankruptcy relief available to consumers: Chapter 7 and Chapter 13.
Debts are typically discharged in three to four months in Chapter 7, while it takes at least three years for debts to be discharged in Chapter 13.
In Chapter 13, monthly payments have to be made to the bankruptcy trustee over a period of 3 to 5 years. The person pays back creditors as much as he or she is able to afford; the rest is wiped out. What one can afford to pay is calculated based on: (a) income and expenses; (b) the value of person's assets, such as money in the bank accounts, paid-off cars and so on. The payment can be as low as $50 per month. Experienced lawyer can prepare a plan that's optimal for your situation and is quickly approved by the court.
In Chapter 7, dischargeable debts are wiped out without any repayment plan. The debts that are not dischargeable (such as recent taxes and child support) and debts that person wishes to pay for (such as car loans or mortgage arrears) have to be dealt with outside of the bankruptcy case.
In Chapter 13, if a person has anything of value that cannot be exempted, it increases the monthly payment to the trustee but a person does not lose this asset.
In Chapter 7, if a person has anything of value that cannot be exempted, the trustee takes away this asset, sells it, and distributes the money to creditors. This generally only becomes a possibility if one has significant non-retirement savings or highly valuable objects or significant equity in the house. In 9 out of 10 Chapter 7 cases, everything can be exempted and there is nothing available for creditors.
In either chapter, if a person's income is over-median, the case becomes more complicated. Additional calculations have to be performed to determine how much, if anything, a person can afford to repay general creditors. The test is rigid, because it caps certain expenses such as rent and clothing. On the other hand, if someone has over-median income but a lot of reasonable expenses, the test may show that little or nothing has to be repaid to general creditors. Reasonable expenses would include mortgage, mortgage back payments, medical expenses, childcare, union dues, taxes and the like.
Credit card debt
Chapter 13 is a better choice for many consumers because the repayment plan allows them to catch up on the mortgage payments at 0% interest, pay back taxes at 0% future interest, pay back car loans at low interest, wipe out the equity loan on the house in some cases, provide the person longer bankruptcy protection and longer period of time to work on loan modification and stave off foreclosure.
Chapter 7 does not have a plan with these benefits, and provides protection from foreclosure and lawsuits for only a short period of time.
Speaking of choices, often but not always a person can choose to go with either Chapter. Your attorney will be able to analyze your situation and make a recommendation as to what type of relief would be better for you. There are details not reflected in this general informational article. In addition, your attorney's advice will also depend on the preferences of the court where your case would be filed.