Bankruptcy Chapter 7 vs. Chapter 13: Which Is Right for You in Indiana?

Filing for bankruptcy can feel overwhelming, but understanding your options is the first step toward financial recovery. If you’re struggling with debt in Indiana, understanding the differences between Chapter 7 and Chapter 13 bankruptcy is crucial to making the best decision for your financial future. Both options offer relief, but they work in distinct ways and are suited to different situations.

Chapter 7 Bankruptcy: A Fresh Start

Chapter 7, often called “liquidation bankruptcy,” is designed for individuals who cannot afford to repay their debts. This option discharges most unsecured debts like credit cards, medical bills, and personal loans. Chapter 7 works best if you have limited disposable income and primarily unsecured debt. However, you must pass the means test, which compares your income to Indiana’s median household income. If your income is too high, you may not qualify for Chapter 7.[1]

However, you may have to surrender non-exempt property, which the bankruptcy trustee can sell to pay creditors. Indiana law protects certain assets (such as a portion of your home equity and personal belongings, including your car), but anything above these exemptions could be liquidated.[2] Chapter 7 is typically best for those with limited income, few valuable assets, and limited or no home equity.

Chapter 13 Bankruptcy: A Repayment Plan

Chapter 13 is known as “reorganization bankruptcy.” Instead of liquidating assets, you propose a three- to five-year repayment plan, making monthly payments to a trustee who distributes funds to your creditors.[3] This option allows you to keep your property, including your home and car, even if you’re behind on payments, as long as you stick to the plan. To be eligible for Chapter 13 bankruptcy, you must have regular income and your debts must fall below certain limits.

Making the Right Choice in Indiana

Your decision depends on several factors: income level, asset values, debt types, and long-term financial goals. Indiana’s bankruptcy exemptions allow you to protect some home equity and personal property. Consider Chapter 7 if you have low income, few assets, and mostly unsecured debt. If you have regular income and want to save your home from foreclosure, or have valuable non-exempt assets, Chapter 13 may be a better fit.

Bankruptcy laws are complex, and Indiana-specific rules can impact your case.  If you have any questions relating to bankruptcy and what might be the best option for you, please contact McNeelyLaw LLP by calling (317) 825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.

[1] http://www.indianabankruptcy.com/means-test/

[2] https://www.uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics

[3] http://www.indianabankruptcy.com/chapter13.html