Deciding between which type of bankruptcy to file isn't always an easy task.
Further, once you decide you may find yourself ineligible for one type of bankruptcy.
In general, there are a few reasons why some people choose to file for Chapter 13 over Chapter 7 bankruptcy.
Mortgage Default Chapter 13 bankruptcy can be more beneficial than Chapter 7 if you have fallen behind on your mortgage payment.
First, your home can be protected from foreclosure with greater confidence than a Chapter 7 case.
The reason is because you will be making payments towards the missed mortgage payments in a Chapter 13 case.
Although bankruptcy exemptions offer protection of the home from seizure during bankruptcy, some state's exemptions rarely cover a house over $200,000.
In many states, there is no guarantee the home is protected from seizure during Chapter 7.
Second, you will be able to repay your delinquent mortgage amounts (arrears) over a specified period of time in Chapter 13.
In many cases, you will be able to repay your missed mortgage payments in a way that you can afford without any additional interest fees or costs.
Asset Protection The biggest issue with Chapter 7 bankruptcy is that some assets are vulnerable for seizure and liquidation.
Bankruptcy exemptions can offer protection of some of your property, but each state's exemption laws vary.
With so much variability in exemption laws, and the federal laws only offering basic protection, this puts assets such as your house, car and personal property at risk during Chapter 7.
There is far less risk of asset liquidation in Chapter 13, mainly due to the fact that the debts are being repaid.
As long as you continue to make your payments through the Chapter 13 plan creditors are not allowed to seize and liquidate assets.
Income Standards Qualifying for Chapter 13 bankruptcy can be easier for many people than qualifying for Chapter 7.
The eligibility standards for Chapter 7 are strict in order to weed out those who could afford to repay their debts.
Many married couples filing jointly find it difficult to qualify for Chapter 7 because their combined income exceeds the eligibility standards.
In general, if your income is greater than the median income of your state, you will be eligible for Chapter 13, but not Chapter 7.
Non-Dischargeable Debts Some debts are not eligible for discharge under a Chapter 7 bankruptcy, but could be repaid through Chapter 13.
Many people make the mistake of filing for Chapter 7 without knowing whether or not their debts qualify for discharge, leaving them with a case dismissal and no debt relief.
The main debts that are not dischargeable through Chapter 7 are taxes, student loan debts, spousal/domestic support payments or debts incurred by fraud.