Filing for bankruptcy is often an effective way for people to climb out from under a mountain of debt and end creditor harassment. If you have decided to file for personal bankruptcy protection, you may be in doubt as to whether Chapter 7 or Chapter 13 is the better choice.
Each has its advantages and drawbacks, but the first item up for consideration will be your income level.
Who can file Chapter 7
If you have very little disposable income, or none at all, you may qualify for Chapter 7 bankruptcy protection. Disposable income refers to any amount that remains after you pay for necessities such as food, shelter and utilities. To determine whether you may file Chapter 7, you will have to pass the means test, which confirms your inability to pay your debts.
How Chapter 7 works
Once you file Chapter 7, your creditors must stop harassing you for payment. They cannot bring lawsuits against you nor can they threaten to collect what you owe through wage garnishment.
With Chapter 7, you can reduce or eliminate your dischargeable debts, but you may lose some personal property in the process. On the upside, this form of bankruptcy usually only takes between 90 to 100 days to complete.
When Chapter 13 is an option
If you are still a member of the workforce and have sufficient income, you may have to file Chapter 13, which is a debt reorganization bankruptcy. This allows you to repay all or a portion of your debts through a court-approved monthly payment plan over a period of three to five years.
Under Chapter 13 you will be able to keep the property on which you are making payments, and your creditors must cease any efforts to collect from you.
Giving up your disposable income for a period of time in order to complete either Chapter 7 or 13 takes some adjustment, but the end result is a clean slate and a much brighter financial future.