There are a few different reasons that people might file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. The primary reason is that Chapter 7 erases or discharges debt quickly without a repayment plan, while Chapter 13 helps borrowers lower their monthly bills and keep important property like cars and houses by putting their unsecured debt into an extended payment plan. Both chapters have income limits and other restrictions, however, that often make them best for low-income filers who don’t own much property, including service-oriented sole proprietors who close their businesses. Individuals who have secured debt that they can’t afford to make up, like mortgage or car loan arrears, also might choose Chapter 13 over other options because they can re-secure their collateral.
Chapter 7 has other limitations, however. For example, it can’t help individuals who have certain kinds of debt that don’t qualify to be “discharged” in bankruptcy, such as recent income tax balances or domestic support obligations. It also isn’t a good choice for high-income filers because the court uses a formula to determine whether their income is above the median level for their state, which could preclude them from filing under that chapter.
Even for those who qualify for Chapter 7, debt collectors can continue to collect on unsecured debts during the bankruptcy process, which can be frustrating and embarrassing. In addition, a trustee may sell non-exempt property in order to pay creditors, and the type of assets that can be sold varies by state. This can result in the loss of some valuable possessions, such as inheritances and second homes.
With Chapter 13, a person creates and gets court approval for a plan to repay some or all of their debts over three to five years, with the unsecured debt being paid down through a consolidated monthly payment. Debtors must include some of their priority debts in this repayment plan as well, and those are typically not forgiven or discharged in Chapter 13.
The ability to change a case from a Chapter 7 bankruptcy to a Chapter 13 one before completion is called a conversion. This isn’t done very frequently, but it does happen from time to time. Most commonly, it occurs because of a significant change in circumstances, such as when a debtor’s income rises and they’re able to pay more toward their unsecured debts through their reorganized payments. It’s also possible to convert from Chapter 7 to 13 in an effort to prevent foreclosure or repossession of a home or car, although there are usually time limits on when this can be done. For this reason, it’s wise to consult a lawyer before considering this option. For more information about this and other bankruptcy-related matters, talk to a bankruptcy lawyer in your area. They can provide the guidance and legal representation you need to successfully resolve your financial problems. They can help you decide if you should file for Chapter 7 or Chapter 13 bankruptcy, and they can assist with the conversion process if it is needed.