Making the decision to file bankruptcy can often be a big emotional step. People will ring their hands and go through endless sleepless nights trying to ascertain the best move. Once they make the decision to go ahead, many just automatically try to file Chapter 7 to liquidate their debts. Sometimes, Chapter 13 makes more sense.
Let's start with the basics. Chapter 7 bankruptcy refers to a section of the bankruptcy code. In Chapter 7, you find the requirements to qualify for the liquidation of one's assets and debts. There is a means test that must be met, credit counseling sessions and so on. The benefit of Chapter 7 if you can qualify for it is that nearly all your debts will be liquidated, but so will most of your assets. It is essentially like becoming a teenager again from a financial perspective. You have no credit or assets, but also no real debt to speak of.
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Chapter 13 is a bit different. Instead of trying to liquidate all your debts, you "reorganize" them. This means coming up with a plan that greatly discounts most of your debts, but pays others. The idea is to pay back your obligations, but reduce them to an amount where you can realistically pay them back. This is known as a bankruptcy plan and offers a good way to get out of a bad financial position.
If you can qualify for it, should you always file Chapter 7? No. The reason is there are different kinds of debts and some you may want to keep. The classic example is your car. If you have a loan against it, liquidating that loan usually doesn't make sense because you will lose the car and how are you going to get around? The same situation can arise with homes and other properties. Sometimes they can be dealt with in Chapter 7, but sometimes Chapter 13 is the better option. The only way to know is to come up with a pre-bankruptcy strategy with your bankruptcy attorney.
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