Chapter 7 and Chapter 13 are the two main bankruptcy options available to people overrun by consumer debt. Before we look at the differences between the bankruptcies, there are two important terms to understand when considering bankruptcy: Unsecured debt and secured debt.
Differences Between Secured and Unsecured Debt in a Bankruptcy
Unsecured debt means that someone loaned you money without a lien. Credit cards and student loans are good examples of unsecured debt, because there’s nothing creditors can directly repossess if the borrower doesn’t pay.
Secured debt, on the other hand, is a loan that is guaranteed by collateral, which is something the lender can take if the borrower defaults. Mortgages and auto loans are examples of secured debt.
Chapter 7 Bankruptcy – The Liquidator
Chapter 7 is considered a liquidation bankruptcy, meaning a debtor’s assets are divvied up among creditors to pay outstanding balances and much of their remaining unsecured debt is discharged. Typically, unsecured debt such as student loans and back taxes are not dischargeable under the plan.
Secured debt such as a home or car can either be relinquished in a Chapter 7 or a debtor may continue to make payments in order to keep one or both. Ninety-five percent of Chapter 7 cases involve debtors who have few assets above the legal threshold so therefore debtors are giving up little in exchange for a clean slate.
Chapter 13 Bankruptcy – Pushing Back on Foreclosures
Chapter 13 takes a different approach to debt. A debtor’s obligations are combined into one regular payment depending on the debtor’s available income. The payment plan can last 3 to 5 years with the possibility of discharging remaining unsecured debt when the repayment period concludes. Chapter 13’s primary benefit relates to secured debt such as a home, because it stops foreclosure proceedings so a debtor can catch up.
Should I File a Chapter 7 or Chapter 13 Bankruptcy?
Chapter 7 and Chapter 13 bankruptcies are different approaches to difficult financial situations. Choosing the right strategy for your unique circumstance is key to getting your finances back on track. Sometimes debtors may give up on keeping their home because they didn’t consider the benefits of a Chapter 13 to stop a foreclosure. Other times, a debtor may run into trouble trying to meet their repayment obligations under Chapter 13, perhaps failing to see the bigger picture, and end up converting to Chapter 7 instead.
Get the Expert Help You Need – Contact an Experienced Illinois Bankruptcy Lawyer
It is a matter of carefully evaluating your financial circumstances to decide what is in your best interest. Getting the help of an experienced bankruptcy attorney who cares about your and your family’s financial recovery is crucial. If you are considering bankruptcy protection and have questions regarding which plan may be right for you, contact the Peoria Bankruptcy Law Offices of Charles E. Covey for more information today at 309-674-8125.