Chapter 7 Versus Chapter 13

For most people, their available Chapters of the Bankruptcy Code under which they can file for bankruptcy boil down to 2 choices: Chapter 7 versus Chapter 13 bankruptcy.  These are, by far, the most common types of bankruptcy filed in the United States.  More than 99% of all bankruptcies filed in the United States are filed under Chapter 7 and 13.  Similarly, with San Diego bankruptcy filings, about 99% of all cases filed are filed under Chapters 7 and 13. The other 4 types of bankruptcy (there are a total of 6 different types of bankruptcy) are very rare and are usually reserved for large corporations (Chapter 11) (also available to individuals but the high expense of such cases makes it a very impractical solution), farmers and ranchers (Chapter 12), municipalities (Chapter 9), and cross-border cases (Chapter 15).

When to File Chapter 13 Versus Chapter 7

So if you are among the more than 99% of San Diego bankruptcy filers who must choose between Chapter 13 versus 7, you may be asking yourself, “which is better, Chapter 13 versus 7?"  To truly answer the question, you will want to discuss your case with a bankruptcy lawyer, who will consider your individual circumstances and your reasons for filing bankruptcy.  While there is no one single factor or rule for deciding whether Chapter 7 or 13 is the most beneficial for your situation, there are general principles that you can expect your lawyer to consider in a typical case in deciding whether Chapter 7 or 13 is the more beneficial for you.  Here are the main reasons you might choose between Chapter 13 over Chapter 7, and vise versa:

When to File Chapter 7

Chapter 7 is generally the preferred debt relief solution for those who just need to eliminate their credit card debt or other unsecured debt.  Unsecured debt means debt that is not secured against property that you own.  Other common examples of unsecured include: personal loans, medical bills, or a judgment that has not been recorded against your property.  (By contrast, common examples of secured debt are a home mortgage loan or a car loan.) 

If you don’t own a home, or if you do own a home but you are on time on your payments, your bankruptcy attorney may recommend that you file under Chapter 7 to eliminate your credit card debt and other unsecured debt.

When to File Chapter 13

Chapter 13 is generally the preferred debt relief solution when you own a home and are behind on your mortgage payments and trying to stop foreclosure of your house.  If you are behind on your mortgage payments, your bankruptcy lawyer will usually recommend that you file under Chapter 13 and repay your missed payments over time.  This will save your home from foreclosure. 

The reason that a Chapter 13 filing can save your home from foreclosure is straightforward.  You must propose and perform under a repayment plan that repays all of your missed mortgage payments, and any missed property taxes, over a 3-5 year period.  This results in you becoming current on your home loan, and property taxes, so there is no longer a reason for your lender to foreclosure.

There are other reasons why you may want to file Chapter 13.  For example, your income may be too high to pass the Mean Test and qualify for Chapter 7 relief, or you may have too much debt to qualify under the strict unsecured debt and secured debt limits for Chapter 13 relief. 

Another common reason that your attorney will recommend Chapter 13 is if you are trying to eliminate a 2nd mortgage or Home Equity Line of Credit (HELOC) through lien stripping.  Lien stripping is a form of loan modification in bankruptcy in which you can reduce or eliminate your 2nd mortgage or HELOC under appropriate circumstances.  You cannot perform a lien strip in a Chapter 7 case.

Keeping Your Assets

Regardless of which Chapter you file under, with the help of an experienced bankruptcy attorney you can usually keep all of your assets (your home, your car, your business, and your other assets) when you file under Chapter 7 or Chapter 13.  The question usually will not be what assets you can or cannot keep (since you will usually keep all of your assets), but rather which remedy is best suited to your needs and goals.

Your Needs and Goals

Before even considering the issue of Chapter 7 vs. 13, you and your attorney need have a clear understanding of what your needs are and what you are trying to accomplish with your bankruptcy filing. Once you and your bankruptcy attorney are clear on what your specific needs and goals are, your attorney will consider a multitude of factors, and carefully consider your needs and goals, in order to give you the best recommended course of action.

Free Consultation

Both Chapter 7 and 13 can help you get out of debt San Diego and get a fresh financial start.  Each has its own benefits and is more suited to a particular type of client.  Contact Bankruptcy Legal Center today to set up a free consultation with a San Diego bankruptcy lawyer to determine which debt relief solution would be most beneficial considering for you, your needs and your goals.

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