There are some steps that have to be taken regardless of what type of bankruptcy is being filed, so let us begin there. The Bankruptcy act which enacted new laws in 2005 has forced individuals to do a number of things before filing. First, they must have taken a credit counseling course within six months prior to filing. The course must be approved by the government to count for filing bankruptcy. While some people may find this burdensome, particularly if they have already taken a course for another reason outside of the six month time frame, it is a rule that is in place so that people can find out if there are other more beneficial alternatives to filing bankruptcy.

If it is still decided that bankruptcy is necessary after taking the credit counseling course, one must decide what type of bankruptcy to file. Both categories of bankruptcy will cost money and leave a scar on credit, but the key to deciding is looking at the individuals situation. Both types of bankruptcy will also put an automatic stay protecting the debtor from creditors and from having property taken out from under them. However, there are a few things that a stay may not always cover and creditors can occasionally ask for stays to be removed. So check with your attorney about what can be protected in your individual situation.

Due to the new laws, not everyone can file a Chapter 7. Chapter 7 is what many people assume when they think of bankruptcy, an avenue to completely wipe out debt and give you a fresh start. It is not necessarily 100% true that Chapter 7 will wipe out all debt, but it does give the consumer a much lighter burden to bear. The problem is that only people who have a small enough amount of disposable income can file Chapter 7. Disposable income is what is left over to spend after all monthly expenses have been paid. The Internal Revenue Service (IRS) is the organization that gets to decide what things should cost, so just because you pay a certain dollar amount, that does not mean the IRS will allow it. Only individuals who have less than $100 a month in disposable income by IRS standards can file Chapter 7. And beyond that, a Chapter 7 will not stop foreclosure indefinitely. Usually a lender will ask to have a foreclosure stay removed as soon as it is possible to do so.

Chapter 13, on the other hand, will more likely help a homeowner keep his/her home. While Chapter 13 requirements are also stringent, requiring the debtor to make enough money for regular payments and to keep up with payments, it will usually protect a home from being foreclosed on if the consumer works to make every payment. Something homeowners need to be aware of is that if they do not make their scheduled payments, they can still put all of their property in jeopardy of being lost.

So Chapter 13 is likely the best choice for someone facing a foreclosure, but each individual has a different situation and the unique characteristics of the situation should be considered before making a final decision.