For many people, discussions of bankruptcy immediately make them think of a Chapter 7 filing. Chapter 7 bankruptcy only takes a few months to complete and results in the discharge of many unsecured debts, including medical bills and credit card balances.
Chapter 13 bankruptcy, on the other hand, requires between three and five years of structured payments to creditors. Both forms of individual bankruptcy are relatively common, although many people focus so much on Chapter 7 bankruptcy that they may overlook the usefulness of Chapter 13 proceedings.
There are a variety of circumstances in which Chapter 13 bankruptcy would likely be the better option for someone. Why do people choose Chapter 13 bankruptcy instead of Chapter 7?
They hope to work with specific creditors again
Individual lenders make decisions about financing based on a variety of different factors. Someone’s prior business relationship with a lender can directly influence how that lender responds to future requests for credit. If someone hopes to work with the same bank or financial institution in the future, it might be a smart move for them to finally Chapter 13 bankruptcy where they repay a portion of their debt to that creditor. Doing so can help preserve the goodwill between the borrower and the business.
They earn above-average income
Qualifying for Chapter 7 bankruptcy requires that someone first pass a means test. Means testing involves adjusting someone’s income for a few allowable expenses and then comparing that figure to the median income for households with the same number of people. Someone who cannot pass the means testing process for Chapter 7 bankruptcy would likely benefit from considering a Chapter 13 bankruptcy instead.
They own valuable property
Although it is rare, Chapter 7 bankruptcies sometimes require the sale or liquidation of personal assets to repay creditors. Thankfully, Chapter 13 bankruptcy does not have any liquidation requirements. Individuals who own substantial personal resources, including business owners, may find that a Chapter 13 bankruptcy is the best option for preserving as much of their property as possible during times of financial hardship.
Recognizing when Chapter 13 bankruptcy is a viable solution for someone with current financial struggles can help people bounce back from their challenges as quickly as possible.