Should I file a Chapter 7 or Chapter 13 Bankruptcy? - Dennis B. Dahlberg

There are many factors to be considered if you are considering filing either a Chapter 7 or Chapter 13 bankruptcy.  The purpose of a bankruptcy is to enable a debtor to obtain a fresh start.  However, the bankruptcy code still needs to balance a creditor’s rights to collect their debts while still assisting the debtor in starting his or her financial life on a new path.

The factors that are considered in a bankruptcy include what you own, to whom do you owe money, why are you unable to pay your debts (i.e. job loss, divorce, failed business, pending lawsuits or garnishments, etc.), what has your income been over the last six months, and what is your potential for future income.  In general, if your unsecured debts equal or exceed one year’s gross income, you will almost never pull out of debt, and you should consider consulting a bankruptcy attorney to see if a bankruptcy filing is right for you.

To file a Chapter 7, the debtor must be a “person”, which could be an individual, couple, corporation, or partnership, who has not been dismissed under a Chapter 7 in the last 180 days.  A Chapter 7 discharge can only be obtained once every eight years.  If there is a prior Chapter 13 case, a Chapter 7 discharge cannot be obtained within 6 years, if the Chapter 13 resulted in a discharge of debts. In a Chapter 7 bankruptcy, you are basically asking the Court to discharge most of the debts you owe. Under a Chapter 7 bankruptcy, you can typically keep property if you are current on the debt.

To file a Chapter 13, the debtor must be an individual (or couple) with regular income. “Regular Income” means income that is sufficient to make payments under a Chapter 13 plan.  Corporations and limited liability companies are not eligible for relief under a Chapter 13. A Chapter 13 discharge cannot be obtained within four years after a Chapter 7 discharge.

Unlike a Chapter 7 filing, in a Chapter 13 bankruptcy you are filing a restructuring plan with the Court to pay back all or a portion of your debts over time. The amount you must repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. Also, unlike a Chapter 7 filing, under a Chapter 13 bankruptcy, you will not lose your property because you are making your monthly payments through the Chapter 13 plan.

As to your future credit, it is difficult to gauge whether currently filing one chapter over another has any advantages for an individual’s ability to obtain future credit.  Chapter 7 debtors, who receive their discharge much sooner than Chapter 13 debtors, often can reestablish credit within a year or two.  Generally, a bankruptcy will stay on your credit report for approximately ten years.

To decide which bankruptcy is right for you, it is important to consult a bankruptcy attorney before proceeding. To get the facts and find out if bankruptcy is the right choice for you, please contact our office for a free consultation with one of our bankruptcy attorneys.

- Dennis B. Dahlberg, Esq.