One of the first questions people ask when contemplating bankruptcy is which chapter they should file under. For consumer debtors (non-business related debts), it is a matter of comparing chapter 13 vs 7. In short, a chapter 7 is a liquidation bankruptcy and a chapter 13 is a reorganization bankruptcy.
A chapter 7 liquidation rarely results in the actual liquidation of assets with some exceptions. A bankruptcy attorney will help you avoid a liquidation.
A chapter 13 reorganization involves reorganizing your debts based on priority and your ability to pay. A bankruptcy attorney will you help you devise a plan that you can afford. Rarely does a debtor pay back all their debts in a chapter 13. The remaining balances are discharged at the end of the plan.
In most cases, it makes sense to file under chapter 7 bankruptcy. A debtor will get a discharge of all their eligible debts within 90 days of filing. Filing a chapter 7 is the fastest and most cost-effective way to obtain permanent debt relief. It does not involve a repayment plan and most people who file under chapter 7 lose very few, if any, assets.
Qualifying for Chapter 7
I have seen cases where a person filed under chapter 13 whereas they could have filed under chapter 7 and saved thousands of dollars. Unfortunately, there are several attorneys in the Denver area who will put their clients into a chapter 13 when the person should have filed under chapter 7. In some cases, the attorney may do this because they do not specialize in bankruptcy law. If you are high income earner (above median) you may still qualify for chapter 7. Bankruptcy attorneys can charge three times as much in a chapter 13 vs 7. If you have been told you don’t qualify based on income, make sure to review the means test forms with the attorney. Before you file under chapter 13, get a second opinion of your eligibility to file under chapter 7.
Sometimes Chapter 13 is Better
A chapter 13 reorganization plan lasts from 3-5 years and involves paying a portion or all of your debts back. A chapter 13 is appropriate for individuals who because of their income do not qualify under the means test to file a chapter 7. Other debtors may file under chapter 13 to protect non-exempt assets (unprotected) they would lose under a chapter 7 liquidation. There are a few other reasons a person may file under chapter 13.