The United States Constitution provides a method whereby individuals, burdened by excessive debt, can obtain a "fresh start" and pursue productive lives unimpaired by past financial problems. Bankruptcy is an important alternative for persons strapped with more debt and stress than they can handle. Chapter 7 is designed for those experiencing a financial hardship and do not have the ability to pay some or all of their existing debts.  Therefore, a Chapter 7 bankruptcy is an effective way to eliminate debts and is commonly referred to as a fresh start. In a Chapter 13 case, one puts forth a plan to repay certain creditors (usually secured accounts such as auto loans and mortgages) over a period of time from future income. The plan in a Chapter 13 case is a document that outlines to the bankruptcy court how all creditors will be paid even if the proposal means a creditor shall receive 0% of the debt that is owed on the account.

Chapter 7 vs. Chapter 13, when is a Chapter 13 bankruptcy more advantageous to file?

Automobiles and real estate are to two main types of property people wish to keep from losing when considering bankruptcy. A Chapter 13 bankruptcy allows one to catch up on past due mortgage payments eliminating the threat of foreclosure; and, allows one to pay for a car loan even if the car was at immediate risk of being repossessed. There is also the benefit of being able to significantly decrease the interest rate and/or principal balance payable on an auto loan. It's important to note that a Chapter 13 bankruptcy takes three (3) to five (5) years from start to finish as debts are being repaid through the bankruptcy. As long as the proposed payments under the Chapter 13 Plan remain current, your property can not be seized by creditors by way of repossession, foreclosure or garnishment.

Chapter 7 vs. Chapter 13, when is a Chapter 7 bankruptcy more advantageous to file?

The primary reason why people choose a Chapter 7 over a Chapter 13 is because they do not have money available to pay all their debts. Even though a Chapter 7 bankruptcy is an effective way to eliminate debt, a Chapter 7 bankruptcy does not mean that you have to give everything up. The rule of thumb of most lenders is to allow you to keep property as long as the account is and remains current by making future contract payments on the account. One may also be able to "redeem" property by making a lump sum payment that represents the current fair market value (FMV) of the collateral in exchange for the account being considered paid off. This differs from a Chapter 13 in that a Chapter 7 requires a lump sum payment for the FMV whereas a Chapter 13 allows for payment of the FMV over the life of the bankruptcy case. A Chapter 7 bankruptcy is also more advantageous to a Chapter 13 because the process takes approximately 4 to 6 months from start to finish.

Chapter 7 vs. Chapter 13, how are they the same?

In many respects, these two chapters of bankruptcy can perform in the same way so which chapter to file boils down to what's going on that has you considering bankruptcy.  The misconception is that one is better than the other because of the desire not to pay all debt in full.  This is a misconception in that if you're trying to keep an auto or home you'd have to pay for the debt in both a Chapter 7 and a Chapter 13 bankruptcy. In a Chapter 7, none of the unsecured accounts will be paid if there is no unexempted property.  In a Chapter 13, one can propose to pay 0% of the unsecured accounts as well if there is no unexempted property. Both Chapter 7 and Chapter 13 bankruptcy provides immediate relief to a wide variety of financial problems such as garnishments, harassing collection calls, lawsuits, repossessions, and foreclosures. Caveat: As long as one has not had more than two (2) bankruptcy cases pending within the twelve (12) month period prior to filing a bankruptcy case, creditors are immediately prohibited from engaging in any collection activity without obtaining court permission first.

Chapter 7 vs. Chapter 13, the quick and easy guide.

The below scenarios are a guide to help you decide if you should file a Chapter 7 vs. Chapter 13 bankruptcy. Mortgage arrears

• mortgage arrears + foreclosure risk = Chapter 7 or Chapter 13 (see other scenarios)
• mortgage arrears + desire to keep property + money left over after other monthly obligations for payment of arrears = Chapter 13
• mortgage arrears + desire to keep property + NO money left over after other monthly obligations for payment of mortgage arrears = Chapter 7
• mortgage arrears + surrendering property = Chapter 7

Auto loan delinquency

• auto loan delinquent + repo risk = Chapter 7 or Chapter 13 (see other scenarios)
• auto loan delinquent + desire to keep auto + money left over after other monthly obligation for payment on auto = Chapter 13
• auto loan delinquent + desire to keep auto + NO money left over after other monthly obligation for payment on auto = Chapter 7
• auto loan delinquent + surrendering auto = Chapter 7
• auto loan delinquent + surrendering auto + desire to purchase another car quickly = Chapter 7

Garnishment

• garnishment for student loan debt = Chapter 13 and seek deferment or forebearance.
• garnishment for any debt excluding student loan =  Chapter 7

The key thing to remember with a Chapter 13 bankruptcy is that there must be money available after your regular monthly household obligations towards repayment of any debt you intend to keep.  The garnishment issue is slightly different in that one could benefit more from a Chapter 13 case if there's a student loan garnishment because a Chapter 7 case lasts only four to six months which means that efforts to resume garnishment on the student loan(s) will resume shortly after the Chapter 7 case is complete. Learn More: Bankruptcy Types