Choosing Between Chapter 7 and Chapter 13 Bankruptcy in Texas

Posted by on Feb 4, 2015 in Bankruptcy | 0 comments

You have made the decision, and your family concurs. You will file for bankruptcy because you have no means of paying your debts without sacrificing your basic needs and that of your family. The next issue is choosing the best way to go about it. Would you be better off with Chapter 7 or Chapter 13?

Bankruptcy is governed by federal law, and although states have their own set of laws for it, they typically closely follow the federal statutes. Under bankruptcy law, there are two distinct types of personal bankruptcy that an individual can file classified as Chapter 7 (because it is Chapter 7 in the Bankruptcy Code) or Chapter 13.

Chapter 7 is liquidation, in which the debtor agrees to place all non-exempt assets into an estate under the management of a court-appointed trustee, who will then distribute the proceeds of the sale of assets to the creditors. A Waco bankruptcy lawyer would make sure that all exempt assets under this type of filing are excluded from the estate. In exchange, the court forgives any debt that may be remaining (with some notable exceptions such as back child support and student loans), enabling the debtor to start fresh. The whole process from filing to discharge takes about six months.

Chapter 13, on the other hand, is reorganization. The debtor agrees to work with the court to construct a repayment plan to manage debt and to negotiate with creditors for better interest rates, longer terms, and waiver of late fees. The debts are not forgiven, although in most cases only part of an unsecured debt i.e. credit card debt needs to be part of the debt management plan. In general, the court allows the debtor up to 5 years to discharge their debts. If the debtor fails to follow the plan, the court may dismiss the petition.

As you can see, Chapter 7 is resolved faster and involves less work for all parties. But because debt forgiveness is involved, the courts reserve this privilege for those who can pass a means test of income. In other words, if you actually have the means to pay, you won’t qualify for Chapter 7. That leaves Chapter 13, which is easier to qualify for. However, if you have property you want to keep that is non-exempt, then Chapter 13 is the better option for you.

Which one will be better for you at the end of the day depends on your circumstances. Consult with a bankruptcy lawyer in your state for a clear picture of your available options.

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