Here are some things to think about before you decide to file for Chapter 7 or Chapter 13 bankruptcy.
For many individuals, filing for bankruptcy relief can provide a way out of debt and a fresh financial start. But whether or not a bankruptcy filing is in your best interest depends on many factors and your individual circumstances. Read on to learn more about what to consider if you are thinking about filing for Chapter 7 or Chapter 13 bankruptcy.
For more information on whether bankruptcy is the right choice for you, see our topic area on Bankruptcy: Should I File?
Will Bankruptcy Help You?
In general, it is a good idea to evaluate all of your options before deciding to file for bankruptcy. Before you file your case, think about the types of debt you have and the goals you want to achieve by filing for bankruptcy. A bankruptcy discharge doesn’t eliminate certain types of debt (these are called priority obligations). This means that filing for bankruptcy may not be in your best interest if all you want to do is wipe out debts that can’t be discharged in bankruptcy. (For detailed information about how specific debts are treated in bankruptcy, see Your Debts in Chapter 7 Bankruptcy and Your Debts in Chapter 13 Bankruptcy.)
In addition, many creditors are willing to work with debtors to settle their debts. If you can afford to resolve your debts outside of bankruptcy, you may not need to file for bankruptcy.
To learn more about your options, see Alternatives to Bankruptcy.
Do You Qualify for Bankruptcy?
Both Chapter 7 and Chapter 13 bankruptcy have certain eligibility requirements. To qualify for Chapter 7 bankruptcy, your income must be low enough to pass the bankruptcy means test. To be eligible for Chapter 13 bankruptcy, the amount of your debts must not exceed certain dollar limits.
For more information on whether you qualify for bankruptcy, see The Means Test & Other Chapter 7 Eligibility Issues and Are You Eligible for Chapter 13 Bankruptcy?
Are You Facing a Lawsuit?
If you don’t make the required payments on your debts, your creditors can take you to court to recover their money. If a creditor obtains a judgment against you in court, it may be able to garnish your wages or place liens on your assets. (Learn more about the ways that creditors can collect debts.)
When you file for bankruptcy, an automatic stay goes into effect that stops almost all collection actions by creditors including lawsuits. If you are being sued by your creditors, filing for bankruptcy relief may help you stop the lawsuit and eliminate the underlying debt.
For more information on how bankruptcy can stop collection activities, see our topic area on Bankruptcy’s Automatic Stay.
Is Your Lender About to Foreclose on or Repossess Your Property?
If you have any debts that are secured by your property (such as a mortgage or car loan), your lender can foreclose on or repossess your property if you default on your obligation. In most cases, you can’t wipe out your lender’s lien on the property by filing for bankruptcy and obtaining a discharge.
However, bankruptcy’s automatic stay can stop or delay the foreclosure and repossession process. In addition, filing for Chapter 13 bankruptcy may allow you to:
- catch up on your missed payments
- reduce the balance of your loan if you qualify for a cramdown, and
- eliminate wholly unsecured junior liens from your house through a process called lien stripping.
How Much Property Do You Own?
One of the most important things to consider before filing for bankruptcy is the value of property you own. Bankruptcy exemptions allow you to keep a certain amount of property in Chapter 7 bankruptcy. But a Chapter 7 bankruptcy trustee has the authority to sell any assets you can’t exempt to pay back your creditors.
If you file for Chapter 13 bankruptcy, you are allowed to keep all of your property but you will have to pay your unsecured creditors at least an amount equal to the value of your nonexempt assets. This means that if you have a significant amount of nonexempt property, filing for bankruptcy may not be in your best interest.
Should You Choose Chapter 7 or Chapter 13 Bankruptcy?
Whether it is in your best interest to file for Chapter 7 or Chapter 13 bankruptcy depends on numerous factors including:
- the types of debts you owe
- your income and expenses
- whether you own any nonexempt property, and
- what you hope to achieve by filing for bankruptcy.
To learn more about when it makes sense to file for Chapter 7 or Chapter 13 bankruptcy, see When Chapter 7 Bankruptcy Is Better Than Chapter 13 Bankruptcy and When Chapter 13 Bankruptcy Is Better Than Chapter 7 Bankruptcy.