If your finances are in such a bad way that you've decided to file for bankruptcy, then you need to choose the best route to take. While all types of bankruptcy help you manage extreme debt difficulties, they are not all the same.

Typically, individuals have to choose between Chapter 7 or Chapter 13 bankruptcies. What are the differences between the two and how do you choose the best option?

What Is Chapter 7 Bankruptcy?

A Chapter 7 bankruptcy allows you to clear your debts without necessarily repaying all of them. During this kind of bankruptcy you have to liquidate some or all of your assets to pay back as much money as you can. Any debts that remain after this are usually written off.

This doesn't mean that you will lose all your assets, however. You might be able to claim that some of your assets are exempt. For example, you might be able to keep your home, vehicle and some personal possessions. If you owe money here, say on a home mortgage loan, then you usually have to carry on making payments to keep them.

What Is Chapter 13 Bankruptcy?

If you have a regular income but are struggling to pay down all your debt with it, then you might need to apply for Chapter 13 bankruptcy. This option works on a repayment plan basis, so you usually don't have to liquidate assets.

Here, you agree a repayment plan with the bankruptcy court. If the court's trustees approve your plan, then you repay your debts to its schedule. So, your repayment amounts typically reduce to become more affordable, but you still have to service your debts according to the terms of your plan.

You probably won't pay off all your debts during a Chapter 13 bankruptcy. Your money usually services secured debts first, such as taxes or home loans. You might then have enough to pay off unsecured debts, such as the money you owe on credit cards. However, if these unsecured debts aren't paid off in full at the end of your bankruptcy term, then they are usually written off.

Which Bankruptcy Option Should You Choose?

Filing for bankruptcy can be a complex process. Your financial circumstances affect which option you can use. For example, you can usually only file for Chapter 7 if your income is below a certain sum set by your state; Chapter 13 regulations put a cap on how much money you can owe.

It's important to file for the right resolution; however, you shouldn't make this decision on your own. For a fast analysis of your situation and professional help during the process, contact a bankruptcy attorney.

Consult with a bankruptcy attorney from a firm such as Southern California Law Advocates for more information.