Chapter 7 vs. Chapter 13

Which One is Right for You?

While both Chapter 7 bankruptcy and Chapter 13 bankruptcy are designed to help people struggling with debt, they do so in different ways. Chapter 7 gets rid of most of your debt and lets you get a fresh start. Chapter 13, on the other hand, lets you keep certain assets that you would otherwise be forced to sell while you pay off all or a portion of your debt.

To decide which Chapter of bankruptcy is best for your situation, let’s look at some examples:

John lives paycheck-to-paycheck, rents an apartment, and paid cash for his used car. Unfortunately, a recent illness has left him with large medical bills. In addition, the illness caused him to miss work for several months. Because he couldn’t work, he made no money and took on a lot of credit card debt to pay his living expenses. He has little or no savings and now creditors are harassing him at work. 

Chapter 7 would be a good fit for john because he doesn’t owe any money on a house or car, has almost no disposable income or savings, and the interest on his debts is making it impossible to ever pay off. Suppose John was $45,000 in debt and that amount was growing with each missed payment.

By filing for Chapter 7 bankruptcy, John would find himself with $0 debt and able to get on with life — but not all debts are that easily forgiven under Chapter 7. Student loans, taxes owed to the IRS, child support and alimony, and criminal fines, fees, and restitution will not be erased by Chapter 7 bankruptcy.

However, with an experienced bankruptcy attorney on your side, it is still possible to get some or all of your student loan and tax debt erased.

To find out more about whether Chapter 7 bankruptcy is for you, call (818) 446-1334 and speak to the legal team at Cal West Law.

Tom owes $5,000 on his car and is $10,000 behind on his house payments. In addition, he’s racked up $40,000 in credit card debt. He makes a decent salary, he just let his debt get out of hand, and now interest is making his debt even larger. If Tom declared Chapter 7 bankruptcy, his credit card debt would disappear, but he would also lose his car and house. 

But, under Chapter 13, Tom’s debt would be reorganized. This means that he would work out a payment plan, based on his salary and expenses, with the help of a trustee and his attorney. Under the plan, they figure that Tom can afford to pay back $30,000 over a three-year period.

Of that $30,000, $20,000 will go to pay off the debt and interest on his "secured debts" (the house and car), and the remaining $10,000 would go toward his credit card debt; but, his credit card debt is $40,000 —how will he pay that? Under Chapter 13 bankruptcy, the remaining $10,000 will be divided up between his four credit cards and the remaining debt will be permanently erased.

How Does Bankruptcy Affect Credit Scores?

Well, there is no free lunch. Both Chapter 7 and Chapter 13 bankruptcies will stay on your credit record for ten years. During that time, you will still be able to get credit, just at a higher interest rate. After ten years, there will be no record of your bankruptcy.

Bankruptcy laws were put in place to protect people from losing everything they’ve worked so hard for. At Cal West Law, we’re proud to be part of the process of putting people’s lives back together.

Call our lawyers at (818) 446-1334 for a free consultation.