For many, Chapter 7 bankruptcy is the better choice

If you are struggling with debt and considering bankruptcy, you are not alone. Between 2012 and 2013, there were 53,300 bankruptcy filings in the federal district covering the Chicago area alone, according to bankruptcy court records. Once you have decided to file bankruptcy, you may learn that you have a choice between Chapter 7 and Chapter 13 bankruptcy, as Chapter 11 is rarely used for individuals. Although both types of bankruptcies achieve similar ends, if you have little or no income or assets, Chapter 7 is often the better choice.

How the types differ

Under Chapter 13, the debtor must make monthly payments towards his or her debt, repaying them in full or in part over a three to five-year period. Although Chapter 13 offers many advantages, such as protection of non-exempt and secured assets, it requires the debtor to have a sufficient and regular income. As a result, this type of bankruptcy is better for those that have many nonexempt assets or those that wish to keep collateral securing certain debts (e.g. the car in a car loan).

On the other hand, Chapter 7 does not require the debtor to make payments towards his or her debt. Instead, a bankruptcy trustee sells the debtor's non-exempt assets and applies the proceeds to the debtor's outstanding debts. Although this sounds like the debtor would lose everything, in reality many important assets such as furniture and clothing are exempt from being sold by law. In most cases, the debtor loses little to no property as a result of filing Chapter 7.

After the sale of the debtor's non-exempt assets, the debtor is granted a discharge of most of his or her unsecured debts (e.g. credit card debt or medical bills) that were not repaid by the sale. Once the discharge is granted, the debtor is no longer obligated to repay the debts.

Means test

In order to qualify for Chapter 7, the bankruptcy laws require the debtor to first pass a means test. If the debtor's income is less than the state's median income, he or she automatically qualifies for Chapter 7. If the debtor's income is above the median, the court examines his or her disposable income. If there is sufficient income left over after paying for certain necessities such as food and housing, the court may order the debtor to file for Chapter 13 instead.

If you are unable to pay your debts, Chapter 7 bankruptcy may or may not be a wise choice, as bankruptcy law full of exceptions. It is therefore important to consult with an experienced bankruptcy attorney. An attorney can analyze your situation and recommend a course of action that would best protect your interests.