Comparing Chapter 7 Bankruptcy and Chapter 13 Bankruptcy
The two most common options for bankruptcy for individuals and families are called Chapter 7 and Chapter 13, named for the sections of the U.S. Bankruptcy Code.
Both bankruptcy options provide debt relief, but they have different processes and outcomes. In this article, we will compare Chapter 7 and Chapter 13 bankruptcy, highlighting their key differences to help you make an informed decision. If you have questions about which path is right for you, talk to a bankruptcy lawyer near you to learn more.
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves selling non-exempt assets to repay creditors. It is typically a quicker process compared to Chapter 13, and if you qualify, it can provide a fresh start. However, it’s essential to weigh the pros and cons before deciding if it’s the right choice for you:
- Quick discharge: Chapter 7 bankruptcy usually takes around three to six months to complete, providing you with a faster resolution to your financial woes.
- Debt discharge: Once the bankruptcy process is complete, you may receive a discharge of your qualifying unsecured debts, like credit card debt, relieving you of the legal obligation to repay them.
- Automatic stay on collections: Filing for Chapter 7 immediately stops your creditors from trying to collect money from you, typically referred to as a “stay.” This includes wage garnishments, repossessions, and other efforts some might consider harassing.
- No repayment plan: Unlike Chapter 13, Chapter 7 does not require a repayment plan, making it less complicated and more straightforward.
- Asset liquidation: Some of your assets may be sold to repay creditors, although exemptions are available to protect certain property, such as your house and personal belongings.
- Hit to your credit report: A Chapter 7 bankruptcy will remain on your credit report for up to 10 years, potentially affecting your ability to obtain credit in the future if you want to buy a house or car or start a business.
- Eligibility criteria: Chapter 7 has strict income eligibility requirements. If your income exceeds the median for your state or you can afford to repay some debts, you may not qualify.
Chapter 13 bankruptcy, also known as a “reorganization bankruptcy,” involves creating a court-approved repayment plan to pay off part or all your debts over three to five years. Most significantly, Chapter 13 requires a longer commitment.
- Debt consolidation: Chapter 13 allows you to consolidate your debts into a manageable repayment plan, making it easier to handle your financial obligations.
- Asset protection: Unlike Chapter 7, you won’t have to sell your assets in a Chapter 13 bankruptcy. Instead, you’ll be able to catch up on debts like missed mortgage payments and protect your property.
- Co-debtor stay: If you have a co-signer on certain debts, a Chapter 13 filing can prevent creditors from going after them as long as you stick to the monthly payment plan.
- Credit repair: While Chapter 13 also impacts your credit score, the effect may be less severe, and you will generally be able to repair your credit faster after completing the repayment plan.
- Longer process: Chapter 13 bankruptcy typically takes three to five years to complete, requiring a more extended commitment compared to Chapter 7.
- Repayment plan: Creating a viable repayment plan requires careful budgeting and adherence to court-approved guidelines.
- Limited debt discharge: You may not be able to discharge all of your debts under Chapter 13, meaning you will still have to repay certain obligations in full.
Eligibility criteria for Chapter 7 and Chapter 13 bankruptcy differ significantly. You must meet specific requirements to qualify for each type:
- Chapter 7 eligibility: To be eligible for Chapter 7 bankruptcy, you must pass the means test, which compares your average income over the six months before filing to the median income in your state. If your income is below the median, you generally qualify for Chapter 7. If it is above the median, you may still qualify based on your disposable income after deducting certain expenses.
- Chapter 13 eligibility: If you have a regular income, you are eligible for Chapter 13, regardless of whether what you earn is below or above the median. You must have enough disposable income to fund a feasible repayment plan over the designated period.
Filing for bankruptcy is a complex legal process with long-term consequences, and it is crucial to make informed decisions to achieve the best possible outcome. When choosing the type of bankruptcy protection to seek, it is essential to carefully consider your financial circumstances, types of debts, goals, and eligibility before deciding.
That makes it essential to consult with a knowledgeable bankruptcy attorney to assess your unique financial situation, understand the specific laws in your state, and receive personalized guidance through the bankruptcy process.
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