This pandemic has placed most Americans in financial hardship. Bankruptcy protection can help you manage your debts and get your life back on track.  Declaring bankruptcy is nothing to be ashamed of, in fact, it gives you another chance to move forward with life. Here we give a rundown of the two common types of bankruptcy and list their advantages and disadvantages.

Chapter Seven Bankruptcy

Chapter 7 bankruptcy is also known as liquidation bankruptcy. A trustee sells or “liquidates” your nonexempt property for the benefit of your creditors. Exempt property is possession considered as a necessity for living and working. 


Relatively speedy discharge

After filing the petition, you can eliminate all unsecured debts within 4-6 months.

No deficiencies

A lender can sell your property through repossession or foreclosure. If the sale doesn’t pay off the amount owed, the remainder is called a deficiency. Bankruptcy discharges deficiency judgments. 

Stop and prevent lawsuits

Filing bankruptcy under Chapter 7 stops any lawsuit. If what the debtor owes is dischargeable, the lawsuit can’t continue and the debtor can eliminate the debt. This bankruptcy chapter also removes judgments for any dischargeable debt incurred. 


Income Requirements

Your income must be below the median income in the state to qualify for Chapter 7. This is calculated with the bankruptcy means test. 

Potentially lose property

Property not protected by bankruptcy exemptions may be sold by the bankruptcy trustee to pay off creditors

Negative credit impact

Your credit report will show in the public record of bankruptcy for 10 years and your credit score will be negatively affected. 

Non-dischargeable debt

Some debts are not eligible for bankruptcy discharge. These include taxes, child support, restitution, student loan debt, alimony, some judgments, and most government debt, among others.

Chapter Thirteen Bankruptcy

 Bankruptcy Chapters 7 and 13Chapter 13 bankruptcy is also called a wage earner’s plan. When you declare bankruptcy under Chapter 13, you propose a repayment plan to creditors, then pay the debt off in installments over 3-5 years. After you pay off your plan, the remaining debt will be discharged. A creditor can’t proceed with any involuntary collection effort.


Get rid of unsecured debt

These include medical bills, credit card debt, and personal loans, among others. These can be eliminated if you pay a small amount through your repayment plan.

Help with tax debt

Income tax debt usually can’t be discharged in a bankruptcy. But if certain requirements are met, some of your income tax debt will be considered nonpriority and can be eliminated much like other unsecured debt.

Save your home from foreclosure

An automatic stay under Chapter 13 stops any foreclosure sale. The repayment plan lets you manage your past-due mortgage

Help with the second mortgage

If you owed more on your first mortgage than the fair market value of your house, your second mortgage lender would not receive anything from the foreclosure because there would be nothing left over after paying the first. If the lender won’t get any money at a sale, your second mortgage is considered as unsecured debt and can be wiped out through a Chapter 13 bankruptcy.

Help with car payments

Chapter 13 can help you avoid repossession. If you owe more than what your car is worth and have owned it for at least 910 days before bankruptcy filings, you might be able to lower your car payments. 

Help with domestic support payments

You can add domestic support obligations, alimony, and child support to your Chapter 13 plan. Once you reorganize your payments, you can avoid jail time and other court cases. 


Negative credit impact

You could lose an estimate of 100-200 points. However, it’s only on record for 7 years, unlike in Chapter 7 where it would be on record for 10 years.

Length of time

A case often lasts 3-5 years before it’s paid in full. Some might negotiate a debt settlement, debt consolidation, or other forms of debt relief as an alternative to bankruptcy.

Low payment flexibility

You must use all your disposable income to repay your debt. You can’t borrow at the payment plan period without approval from the bankruptcy court. And if you get a pay raise or any income increase, then the installments amounts could increase, too.

If you’re unsure which bankruptcy type to file for, it’s best to talk to an experienced bankruptcy attorney. At Phoenix Fresh Start Bankruptcy Attorneys, we can discuss your options with you and help you get back on track to financial success. Call us today to schedule a free consultation!