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Which Personal Bankruptcy Chapter is Right for Me?

When deciding whether to file Chapter 7 or Chapter 13 bankruptcy, three major factors come into play:

  • Your circumstances such as income, assets, and character of your debts
  • Your goals
  • The law

Part of your decision between Chapter 7 and Chapter 13 hinges on what assets you own and whether retaining those assets is one of your goals. If you rent, or if you own a home but you have no or little equity in the home you may benefit more from Chapter 7.

In a Chapter 7 bankruptcy, the court-appointed bankruptcy trustee collects your non-exempt assets, sells them, and uses the proceeds to pay off your creditors. At the end of the process, the court discharges any remaining unsecured debts, like credit card debts or debts related to medical expenses. In most Chapter 7 cases, the debtor is able to exempt and retain all of his or her assets.

If you have assets you want to keep that you could lose in a Chapter 7 case, and you have income to make payments, Chapter 13 might make more sense for you. In a Chapter 13 bankruptcy, you make a payment per month based on your income and your allowable expenses. You do not have to sell any of your assets.  Your payment plan will last between 3 and 5 years. Creditors entitled to receive a distribution from your plan will receive the benefit of your plan payments. In most Chapter 13 cases the amount your creditors receive will not pay off those debts completely.  You will receive a discharge of the amount that was not paid.

People who do not have many large assets, do not have much equity in their homes or vehicles, and have moderate incomes, often must choose between Chapter 7 and Chapter 13. You should examine your goals and motivations. Some people feel they have a moral obligation to repay debts, even if they could legally discharge them through a Chapter 7 bankruptcy. In that case, you may choose Chapter 13 even if Chapter 7 remains available to you. Other people simply want to get a fresh start as soon as possible. They may not have many assets, or they may not care to protect the assets they have. For them, Chapter 7 liquidation bankruptcy makes the most sense.

Some people have problems with debts like a mortgage default, car loan default or back taxes.  A Chapter 7 will not solve those problems. For those people, Chapter 13 allows you to make a payment plan to cure those defaults.

Finally, even though you would prefer a Chapter 7 bankruptcy, you may legally not have that option because you may make too much money.  Everyone who files bankruptcy must be qualified through a process called the Means Test to determine if they qualify to file a Chapter 7 bankruptcy and how much they need to repay in a Chapter 13 bankruptcy. Generally, Chapter 7 is not available to people with higher incomes.

A consultation with a seasoned Pennsylvania bankruptcy attorney is will help you determine whether bankruptcy is the best option for you.

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