Which bankruptcy is right for me?

Well, generally, in a consumer based practice like ours, we file Chapter 7’s and Chapter 13’s for clients. Typically, we are bound by what's called the means test, a congressionally imposed test, that essentially determines whether or not someone has disposable income. When they do have disposable income, they're required to file a Chapter 13 and pay a portion of their debt back. A lot of people are confused and they think they have to pay everything back in five years and that's not the case, they just pay a portion of what's affordable.

And then a Chapter 7, if you don't have disposable income, a client would usually file a Chapter 7. Sometimes, there's differences with respect to assets they might be keeping as to which chapter, so it's important to see an attorney to determine what can be kept, if you have to pay for what you're keeping, and which Chapter to file and how to file.

If you are trying to catch up on missed payments on a mortgage or automobile, a Chapter 13 is best. A Chapter 13 is also known as a “reorganization” – you have a Chapter 13 Plan which provides direction as to what creditors and what debt is being caught up which is called “reinstatement” and which debt you are getting rid of. There is an opportunity to assume or reject leases and contracts. You also have several options with other secured property like Rooms To Go furniture for instance. You can surrender items, redeem them for cash for their current fair market value or reaffirm the same payment arrangement you have now.

If you have erratic income, a Chapter 13 is often difficult because the payment plan is rather rigid – the same amount is due each month regardless of whether you got paid that month. So it would be nearly impossible for someone who worked on straight commissions for instance. A Chapter 13 does allow for short term stays on payments, and also for longer modifications of plan in the event of a job change or something. But for daily or monthly fluctuations, there is no protection of having a lower payment one month.

Creditors don’t seem to view one Chapter better than the other. You would think that a creditor would view a Chapter 13 more favorably since you’ve chosen to repay what you could afford to pay, whereas a Chapter 7 does not have a repayment plan. But each bankruptcy appears to be viewed about the same by creditors.

For rebuilding your credit, I believe a Chapter 7 is best because it is much shorter – only 90 days. A Chapter 13 lasts for 3-5 years depending upon various factors.

There are significant legal differences between the Chapters and it can be risky to file the wrong chapter. Things like inheritances, ongoing personal injury accident cases, property ownership issues all are impacted differently between the different bankruptcies. So please consult with experienced bankruptcy counsel before deciding which chapter is best for you.