A chapter 7 bankruptcy is pretty much a silver bullet solution for the most common types of unsecured debt people have: medical bills, payday loans, auto repossession deficiency balances, bank overdraft fees, credit cards, broken leases and such. If you are being sued or having your wages garnished to collect on this type of debt, filing bankruptcy will immediately stop the lawsuit and the garnishment. The chapter 7 will completely wipe out your obligation to repay these debts. It’s awesome!
Chapter 7 bankruptcy won’t help you with this kind of debt: taxes (except in some rare circumstances), child support, alimony, payments ordered to be made as part of a divorce decree, restitution, criminal court fees and fines, or secured debts like home loans or car loans. If you want to give up your home or your car, you can do that in a chapter 7 and walk away from any remaining debt on the property.
Chapter 13 is a great way to deal with debts that you cannot wipe out in a chapter 7. So if you owe some taxes or child support arrears, or you have fallen behind on your car or home payments, filing chapter 13 consolidates all of these debts and lets you pay them back at a rate that is affordable for you. If you have a lot of unsecured debt that would be perfect to wipe out in a chapter 7 but for some reason you aren’t eligible for a chapter 7, chapter 13 lets you pay off the unsecured debt at just pennies on the dollar over a 3 to 5 year repayment plan, then discharge any unpaid debt still remaining at the end of the plan. This is so amazing. When I tell people about this they simply cannot believe it.
Let me give you an illustration that is very, very common in my office. Mr. and Mrs. Jones owe $45,000 in credit cards and medical bills that is costing them $600 per month just to make the minimum monthly payments. They also have a car payment of $280 per month and they need to keep their car. They earn $50,000 per year between the two of them. They file chapter 13 bankruptcy and put their auto loan and all of their credit cards and medical bills into the bankruptcy repayment plan. Their single monthly payment is reduced to $175 per month and that includes the payment on their car and all of the other debt that was sinking them. How can this be? Because in most chapter 13 cases, you are not required to pay back even one cent to unsecured creditors. This allows you to keep your bankruptcy payment very low and manageable. Honestly, chapter 13 is the greatest thing since sliced bread when it comes to dealing with debts.
Both chapter 7 and chapter 13 bankruptcy offer a lot of relief from debt. When you consult with a bankruptcy attorney, do not accept their recommendation as to which type of bankruptcy without first asking how the other type of bankruptcy might benefit you. I am not saying a lawyer would deliberately put you into the wrong kind of bankruptcy, but you should have both options explained to you and then be given the choice as to what seems best for you.