Should I choose Chapter 7 or Chapter 13?
Depending on your situation, one type of bankruptcy may be better than another.
If you are having debt problems, you may have researched your bankruptcy options. Having done so, you may already know that there are two types of bankruptcy available to individual filers-Chapter 7 and Chapter 13. However, it may be less clear about which type is better for you. This is an important decision that can determine the success or failure of your financial recovery.
Chapter 7 overview
For the majority of those filing bankruptcy, Chapter 7 is the type of bankruptcy chosen. It is no wonder, as it offers a quick discharge of most unsecured debt, such as credit card bills and medical debts. The relief from this type of debt comes rather fast, as the bankruptcy process often only takes as few as three months to complete.
One of the drawbacks to Chapter 7 is that it involves a liquidation sale of assets. Although many filers fear losing their property during the sale, this fear is often unfounded. Most important assets such as home equity, motor vehicles, furniture and personal or business items are exempt from the sale by New Mexico or federal law. Because of this fact, few filers lose significant assets during the process.
Because of how Chapter 7 works, it is generally better for filers that have few unencumbered nonexempt assets. Also, it is not ideal for those with a significant amount of disposable income, as it requires all filers to first pass a means test in order to qualify for its relief.
Chapter 13 benefits
If you have significant assets that are not exempt from Chapter 7's liquidation sale or have considerable disposable income, Chapter 13 is likely a better choice for you. As there is no liquidation sale during Chapter 13, all filers can keep their property-exempt or nonexempt-throughout the process. Instead of a sale, filers make a monthly payment toward some of their debt pursuant to a payment plan lasting three to five years. At the end of the repayment period, most debts not fully repaid or addressed by the payment plan are eliminated.
This type of bankruptcy is especially beneficial for those facing foreclosure. Under the plan, filers have the entire repayment period to catch up to their overdue mortgage payments. During this time, lenders may not foreclose, as long as the agreed monthly payment is made.
Additionally, Chapter 13 can give filers more time to catch up on debts that cannot be discharged in bankruptcy, such as alimony, child support, student loans and most taxes. By allowing the overdue portion of these debts to be stretched out over the repayment period, Chapter 13 can make catching up on these debts affordable. Also, Chapter 13 protects the filer from any attempts to collect these debts (e.g. lawsuits or garnishments) during the entire repayment period.
An attorney can help you decide
Although it may seem simple at first glance, choosing the right type of bankruptcy involves a careful consideration of factors that are unique to your situation. An experienced bankruptcy attorney can review your financial status and recommend the best path to relief.