If you have excessive consumer debt and are considering filing for protection, it's essential you understand your options. Filing bankruptcy requires a lot more deliberation than just acknowledging you’re drowning in credit card debt.
One of the most significant decisions is whether to file for Chapter 7 or Chapter 13. Both types of bankruptcy remain on your credit history for 10 years, but they can each have a unique effect on your financial health (or lack there of). In simple terms, “under Chapter 7 your assets are sold to pay off your debts and the remaining debt is discharged,” says Michael Eisenberg, spokesperson for the American Institute of Certified Public Accountants. In other words your slate is wiped clean. “Under Chapter 13, you’re not required to sell assets, but you can rearrange your debt based on your income and pay it off in three to five years.” Meaning less debt is forgiven, but that you also get to keep more of your stuff.
Reorganizing your debt under Chapter 13 can be extremely effective in dealing with debts that won’t be handled under Chapter 7, says bankruptcy attorney Leon Bayer, a partner at Bayer, Wishman & Leotta based in Los Angeles. Tax debt, for example, isn’t relieved through Chapter 7. It can also help someone who might have significant debt, but can also afford day to day expenses. For example, say a person loses his job and falls behind on mortgage payments. Even if he finds new employment, if delinquent mortgage payments aren’t repaid, the bank will foreclose. “Filing of Chapter 13 will stop the foreclosure and put a homeowner back on a payment schedule that requires paying regular payments again to prevent getting further behind,” says Bayer. “Each month you pay something extra to catch back up again. You’ll walk gradually forward to get yourself out of this.”