Many people who decide bankruptcy is the best option for them are confused about the difference between the two types of consumer bankruptcy -- Chapter 7 and Chapter 13.

Chapter 7 and Chapter 13 each have advantages and disadvantages, but an analysis of the debtor’s individual situation usually indicates clearly which one would be best suited to the debtor’s needs.

Chapter 7, also called "straight bankruptcy" or liquidation, is the faster, easier, and usually less expensive of the two types. A Chapter 7 case allows a debtor to discharge unsecured debt (such as credit cards, medical bills, and personal loans), discharge certain taxes, and keep secured property, such as vehicles, a home, or furniture, so long as the payments are current. Debtors seldom lose any of their personal property in a Chapter 7 case.

However, Chapter 7 does not provide a payment plan for getting caught up on late car payments or mortgage payments, or for paying taxes out over time. Those debts must be brought current very quickly after filing the Chapter 7 case. Also, if the debtor’s income is too high, it may be necessary to file a Chapter 13 case and repay some portion of the debtor’s unsecured debt.

Chapter 13 offers the debtor an opportunity to repay debts over time. In many cases, most or all of the unsecured debt is still discharged, just as in a Chapter 7. A Chapter 13 Plan can be proposed to allow payment over 36 to 60 months of other debts, such as delinquent house payments, child support, property taxes, income taxes, vehicle payments, and other secured debts.

If a debtor’s vehicle was purchased more than 910 days before the case was filed, it is also possible to "cram down" the amount paid on the car and only pay back the amount of the vehicle’s value, rather than the entire amount owed. Normally, interest rates on vehicles can be reduced considerably, no matter how long ago the car was purchased. At this time, the courts are allowing interest rates on vehicles to be lowered to 4.25%, which is usually far less than the interest rate the debtor was paying before filing the Chapter 13 case.

Another advantage of a Chapter 13 case is that federal income taxes can be paid without incurring any further penalties or interest after the date the case is filed.

It is very important that you consult an experienced bankruptcy lawyer to help you decide which type of bankruptcy case would be the best option under your individual circumstances, and to make sure your assets are protected. Bankruptcy laws are complex, and only an experienced lawyer can give you all the information necessary for you to make an informed decision.

If you have any questions concerning bankruptcy or any other aspect of consumer law, please give us a call, and we will be happy to discuss your situation with you at no charge, and set up a convenient time for an office consultation if you decide filing for bankruptcy is your best financial option.

For much more information about the advantages and disadvantages of filing for bankruptcy, and for information about many other aspects of consumer law in Texas, please visit our law firm's Texas Bankruptcy Law blog.