What Is the Difference Between Bankruptcy 7 and 13?
Bankruptcy is a legal process that provides individuals and businesses with a fresh start by eliminating or restructuring their debts. The most common types of bankruptcy filings for individuals are Chapter 7 and Chapter 13. While both options offer debt relief, there are significant differences between the two. This article aims to clarify the disparities between Chapter 7 and Chapter 13 bankruptcy and provide answers to frequently asked questions.
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is designed for individuals or businesses with limited income and assets. This type of bankruptcy allows debtors to discharge most of their unsecured debts, such as credit card bills, medical bills, and personal loans, without having to repay them. However, certain debts, such as student loans, child support, and tax debts, may not be dischargeable.
To qualify for Chapter 7 bankruptcy, individuals must pass the means test, which compares their income to the median income of their state. If their income is below the median, they automatically qualify. If their income is above the median, they must further analyze their expenses to determine if they have enough disposable income to repay a portion of their debts. If they do not, they may still be eligible for Chapter 7.
Once a Chapter 7 bankruptcy is filed, an automatic stay goes into effect, halting all collection efforts, including wage garnishments, foreclosure, and creditor harassment. A trustee is appointed to oversee the case, evaluate the debtor’s assets, and liquidate any non-exempt property to repay creditors. However, most individuals who file Chapter 7 bankruptcy can keep their essential assets, such as their house, car, and personal belongings, through exemptions provided by federal or state laws.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy, also known as reorganization bankruptcy, is an option for individuals or businesses with regular income who want to retain their assets and repay their debts over time. Unlike Chapter 7, Chapter 13 does not involve liquidating assets. Instead, debtors propose a repayment plan that lasts three to five years, during which they make monthly payments to a trustee who distributes the funds to creditors.
To qualify for Chapter 13 bankruptcy, individuals must have a stable income and debts within certain limits. There is no means test to pass, but secured debts, such as mortgage or car loans, must not exceed specific thresholds. Chapter 13 bankruptcy is particularly suitable for those facing foreclosure or repossession, as it allows debtors to catch up on missed payments over the duration of the repayment plan.
During the repayment plan, an automatic stay is also implemented, protecting debtors from collection actions. Debtors are allowed to keep all of their assets, as long as they make the agreed-upon payments. Once the repayment plan is completed, any remaining eligible debts are discharged.
Q: How long does bankruptcy stay on my credit report?
A: Bankruptcy can remain on your credit report for up to 10 years, affecting your ability to obtain credit or loans during that time. However, its impact lessens over time as you rebuild your credit.
Q: Can I choose which type of bankruptcy to file?
A: The type of bankruptcy you can file depends on your individual circumstances, income, and assets. Consulting with a bankruptcy attorney can help you determine the most suitable option for your situation.
Q: Can I file for bankruptcy multiple times?
A: Yes, but there are time limits between filings. If you previously filed for Chapter 7 bankruptcy, you must wait eight years before filing again. If you previously filed for Chapter 13 bankruptcy, you must wait two years before filing for Chapter 13 again or four years before filing for Chapter 7.
Q: Will bankruptcy eliminate all my debts?
A: Bankruptcy can discharge most unsecured debts, but there are exceptions, such as student loans, child support, and tax debts. Consulting with a bankruptcy attorney will help you understand which of your debts can be discharged.
Q: Can I keep my house if I file for bankruptcy?
A: Whether you can keep your house depends on the type of bankruptcy you file and the equity you have in the property. In Chapter 7, exemptions may allow you to keep your home, while in Chapter 13, you can retain your home as long as you make the agreed-upon payments.
In conclusion, the difference between Chapter 7 and Chapter 13 bankruptcy lies in the approach to debt relief. Chapter 7 allows for the discharge of most debts through liquidation, while Chapter 13 involves creating a repayment plan to gradually pay off debts. The choice between the two depends on individual circumstances, income, and assets. Seeking professional advice is crucial to understanding the implications and benefits of each option.