Chapter 7 vs Chapter 13 Bankruptcy

When facing financial difficulties, bankruptcy can be a viable option to regain control of your financial situation. Chapter 7 and Chapter 13 bankruptcies are the two most common types, and understanding the differences between them is crucial in determining which one is best for you. In this blog, we will discuss the key differences between Chapter 7 and Chapter 13 bankruptcies and help you make an informed decision based on your unique circumstances.

Chapter 7 Bankruptcy

Also known as “liquidation bankruptcy,” Chapter 7 is ideal for individuals with limited income and assets. This process discharges most unsecured debts, such as credit card balances, personal loans and medical bills. Non-exempt assets may be sold to repay creditors. However, exemption laws protect assets from the reach of a bankruptcy trustee.  The process is relatively fast, typically completed within 3-6 months.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” is suitable for individuals with regular income and assets. Instead of discharging debts, this process involves a repayment plan to pay off all or or a portion of debt over a 3-5 year period. The advantage of Chapter 13 is that it allows you to keep your assets and can help catch up on missed mortgage or car payments and real property taxes and it stopsand prevents foreclosures and repossessions.

Key Differences Between Chapter 7 and Chapter 13 Bankruptcy

Eligibility

Who Can File for Chapter 7 or Chapter 13 Bankruptcy? To file for Chapter 7, you must pass the “means test,” which compares your income to the median income in your state. If your income is below the median, you may qualify for Chapter 7. Chapter 13, on the other hand, is available to individuals with a regular income source and unincorporated businesses. However, total debt must be below the maximum limit stated in Section 109 of the Bankruptcy Code.

Property and Assets

In Chapter 7, non-exempt assets can be sold to repay creditors. State law determines which assets are exempt. Conversely, Chapter 13 allows you to keep your assets, including non-exempt property, while repaying debts through a court-approved plan.

Debt Discharge

Most unsecured debts can be discharged in Chapter 7, while some debts, like student loans, alimony, and child support, are not  dischargeable. In Chapter 13, debts are restructured and repaid through a payment plan, with some debts potentially being discharged at the end of the plan.

Timeframe

The Chapter 7 process is generally faster, taking approximately 3-6 months to complete. Chapter 13, on the other hand, involves a repayment plan lasting 3-5 years, making the process longer but allowing for more manageable payments. The length of the term depends on your individual situation.

Impact on Credit

Both Chapter 7 and Chapter 13 bankruptcies may stay on your credit report for up to 10 years. However, some lenders may view Chapter 13 more favorably than Chapter 7, as it demonstrates a commitment to repaying debts.

See also: Filing Bankruptcy on Credit Cards

Co-signers

In Chapter 7 bankruptcy, co-signers on your debts may still be held responsible for the debt after your bankruptcy. In Chapter 13, co-signers may be protected from collection efforts during your repayment period and you can separately classify co-signed debts to be repaid during the chapter 13 reorganization plan.

Deciding Between Chapter 7 and Chapter 13 Bankruptcy

Choosing between Chapter 7 and Chapter 13 bankruptcy depends on your financial situation, assets, and long-term goals. Consider the following factors when making your decision:

• Your income and ability to pass the means test
• The types of debts you owe
• The value and nature of your assets
• Your ability to commit to a repayment plan
• The impact on your credit and future financial goals

Consulting with an experienced bankruptcy attorney who can communicate complex legal concepts in layman’s terms is essential in helping you make the best decision for your situation. They can guide you through the process, evaluate your financial circumstances, and provide personalized advice on whether Chapter 7 or Chapter 13 bankruptcy is the right choice for you. Remember, bankruptcy is a significant decision that will impact your financial future, so take the time to gather information and seek professional advice before moving forward.