Think Chapter 7 bankruptcy is always the way to go? Not so fast

When faced with debt problems, may people assume that Chapter 7 is the right type of bankruptcy for them to file. This is true largely because most people have heard of Chapter 7 and therefore think that it is the only choice for individual filers. However, for many people, the other type of individual bankruptcy- Chapter 13-would be a better choice. How do you know when you should consider Chapter 13 over Chapter 7? There are four primary situations when this may be the case.

You have nonexempt property

If you have property that is not protected from the liquidation sale in Chapter 7 that you would like to hold on to, you should strongly consider filing Chapter 7. Common examples of nonexempt property include second homes, multiple vehicles and most luxury items. Chapter 13 allows you to hold on to this property while you pay off or catch up on the debts you owe. In Chapter 7, on the other hand, this property would have been sold to pay your debts during the liquidation sale.

You are at risk of losing your home

If you are behind on your mortgage, Chapter 13 is especially useful. Under the Chapter 13 payment plan, you are given 3-5 years to catch up with your missed mortgage payments using monthly installment payments. As long as you pay what you owe each month, your lender may not continue or restart foreclosure proceedings against you. In the meantime, you can stay in your home as you catch up on your payments.

This is significantly more help than Chapter 7 offers. Although it can discharge what you owe on your mortgage, Chapter 7 does not affect your lender's right to foreclose on your house if the mortgage is not kept current.

You want to protect cosigners

Chapter 13 is also beneficial if you have cosigners on a loan or other debt. Chapter 13 prevents your creditors from harassing your cosigner or holding him or her liable for the full amount of the debt. This protection would not exist had you filed Chapter 7 instead.

You have nondischargeable debts

If back taxes, alimony, child support or other obligations that cannot be discharged in bankruptcy are among your debts, you should strongly consider Chapter 13. Although it does not eliminate your obligation to repay these debts, Chapter 13 does give you 3-5 years under the plan to repay them or become current on them. While you are paying off these debts, Chapter 13 protects you from having your wages garnished or having to suffer through any lawsuits or other collection attempts concerning them.

An attorney can recommend a workable solution

If you are behind on your debts and are considering bankruptcy, it is wise to consult an experienced bankruptcy attorney. An attorney can listen to your problems, outline possible solutions and recommend the best way to get your finances back on track.