The Pros and Cons of Chapter 7 and Chapter 13 Bankruptcy

Once you've made the decision to seek bankruptcy protection, one of the biggest choices you'll face is which chapter to use. Most individuals filing for bankruptcy use one of two routes: Chapter 7 or Chapter 13. What are the benefits of each method? And what drawbacks do they have? Which is right for you? Here's a short guide to the pros and cons of these two popular choices. 

The Pros and Cons of Chapter 7

Chapter 7 bankruptcy is often favored for its speed. A simple Chapter 7 case could be filed and completed within months. The reason is that assets and debts are calculated once. If you're looking for a fresh start, this is the fastest — and generally least expensive — route to it. 

Depending on your situation, your may not lose assets. The federal bankruptcy rules and most states have a list of properties you may exempt from liquidation. This commonly includes a maximum value in your primary home, a vehicle, tools for your trade, personal property, jewelry, and firearms. Due to their financial struggles, many debtors' assets fall under these thresholds and little is lost. 

Known as liquidation bankruptcy, though, Chapter 7 does come with the risk of losing the assets if propper planning is not done. Although you may exempt some property, the permitted amounts are not generous. Chapter 7 also generally provides few options to get current on secured debts like your car or home. 

Finally, not everyone will qualify for Chapter 7. High earners who want to use it may find themselves barred and forced to choose Chapter 13 instead. 

The Pros and Cons of Chapter 13

Chapter 13 is a less understood form of bankruptcy, so some debtors may not fully utilize its advantages. Known as reorganization or wage earner's bankruptcy, this chapter lets you set up a three- to five-year payment plan for qualifying debts. At the end of this period, remaining eligible debts are discharged. Unlike Chapter 7 which has income limits, nearly all debtors can use Chapter 13.

Of primary importance to many, Chapter 13 can help you keep secured assets you would lose in Chapter 7. You can often use the repayment period to get current on arrears and stretch out payments to make them manageable each month.

You also get the benefit of the automatic bankruptcy stay during your repayment period. The stay prevents most creditors from pursuing collections regarding any debts that are or could be included in your case. Although it's temporary, this takes significant pressure off the borrower and may allow you to come up with a more permanent solution. 

There are two main drawbacks to Chapter 13, though. One is the length of time you'll spend in the bankruptcy itself. You may be dealing with it for up to five years, during which time a lot can change in your life. In addition, you must pay back to creditors at least what they would have received from liquidation — and may end up paying even more. 

Obviously, there is a lot to think about when it comes to choosing the right chapter of bankruptcy. The best resource to help you is a qualified bankruptcy attorney in your state. Arkansas debtors should call on Knollmeyer Law Office to get started. We'll work with you to assess all your options, help you choose the best one, and successfully complete it. Call today to make an appointment.