Chapter 7 and Chapter 13 are the two main branches of bankruptcy, but one option is typically better than the other for an individual's circumstances. Every situation is different, and lawyers base their recommendations on multiple factors. Here are several reasons a lawyer might suggest using Chapter 7 instead of Chapter 13.
Most of Your Debts Qualify for Discharge
The type of debts you have plays a huge role in the branch of bankruptcy a lawyer will recommend using. Lawyers typically classify debts in two categories:
- Priority debts - Attorneys might also call these secured debts, and they typically refer to debts that have collateral or that cannot receive a discharge in bankruptcy. This often includes mortgages, car loans, child support and student loans.
- Non-priority debts - Non-priority debts include unsecured debts, like credit cards and medical bills. Debts that fall into this category can receive a discharge through Chapter 7.
The main difference between Chapter 7 and Chapter 13 is the way the court handles debts. In Chapter 7, the court discharges non-priority debts, but Chapter 13 requires a repayment of these. In both branches, people typically must repay priority debts they owe.
Because of the differences in these two branches, your lawyer will want to see every debt you owe. If the lawyer finds that most of your debts qualify for a discharge, he or she is likely to suggest using Chapter 7.
Your Income Is Low
The second factor lawyers evaluate is a person's income. People must earn less the median income in the state they live in to qualify for Chapter 7. If a person earns more than this, the court assumes he or she can repay the debts owed with a restructured repayment plan.
To determine if your income qualifies you for Chapter 7, you should show your lawyer paystubs and tax returns. The lawyer may ask if you had any other types of income during the last six months. Your lawyer must include any income or windfall you received within the last six months to determine your eligibility.
Your lawyer must compare your income to that of your state, and this will reveal whether or not you qualify for Chapter 7.
You Are Not Facing Foreclosure or Repossession
Finally, if you are facing a foreclosure or repossession, your lawyer will probably suggest Chapter 13 bankruptcy. Chapter 7 bankruptcy is often the better option of the two branches for people who do not have high incomes and that have a lot of non-priority debts, but it is not the best choice for someone facing a foreclosure or repossession.
If you do not own a home, you will not face foreclosure. If you do own a home but are current on the payments, you should have the right to keep your home even if you file Chapter 7. The same thing is true for cars and car payments. With Chapter 7, your living situation would not need to change and you could have a start toward a better financial future.
These are some of the main factors that lawyers look at when evaluating bankruptcy cases. After a lawyer reviews your case, you will know if bankruptcy is an option you should pursue. If you decide to pursue either form of bankruptcy, make sure you learn exactly how it will help you and the consequences you will face if you go through with filing.
If you are struggling to pay your bills and are tired of creditors calling you, contact Terry E. Hurst, Attorney at Law. Our firm can help you determine if bankruptcy is right for you and which branch you should file based on your situation.