What Is the Difference Between Chapter 7 and 13 Bankruptcy?
Bankruptcy is a legal process that individuals or businesses can use to eliminate or repay their debts. Two common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Understanding the differences between these two options is crucial when considering bankruptcy as a solution. In this article, we will explore the key distinctions between Chapter 7 and 13 bankruptcy and address some frequently asked questions.
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is the most common form of bankruptcy for individuals. It allows debtors to discharge most, if not all, of their unsecured debts, such as credit card debt and medical bills. However, not all debts can be discharged, such as student loans, child support, and certain tax debts.
To qualify for Chapter 7 bankruptcy, individuals must pass the means test, which compares their income to the state’s median income. If their income is below the median, they are eligible for Chapter 7. If their income is above the median, they may still qualify based on their disposable income and other factors.
In Chapter 7 bankruptcy, a trustee is appointed to liquidate non-exempt assets to repay creditors. Exempt assets, such as a primary residence, vehicle, and personal belongings up to a certain value, are protected from liquidation. The process typically takes around four to six months, after which the debtor receives a discharge, relieving them of the obligation to repay discharged debts.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy, also known as reorganization bankruptcy, is an alternative to Chapter 7 for those who do not qualify or have significant assets they want to protect. Unlike Chapter 7, Chapter 13 does not involve liquidating assets. Instead, debtors create a repayment plan to pay back all or a portion of their debts over three to five years.
To qualify for Chapter 13 bankruptcy, individuals must have a regular source of income and unsecured debts below a certain threshold (currently $419,275) and secured debts below a certain threshold (currently $1,257,850). Chapter 13 allows debtors to keep their assets while catching up on missed mortgage or car loan payments over the repayment period.
Under a Chapter 13 plan, debtors make monthly payments to a trustee, who distributes the funds to creditors. Once the repayment plan is completed, any remaining unsecured debt is discharged. Chapter 13 bankruptcy provides individuals with an opportunity to reorganize their finances and repay their debts over time.
Q: Will filing for bankruptcy ruin my credit?
A: Bankruptcy will have a negative impact on your credit score and can remain on your credit report for up to ten years. However, it is possible to rebuild your credit over time by demonstrating responsible financial behavior.
Q: Can I choose between Chapter 7 and 13 bankruptcy?
A: Your eligibility for Chapter 7 or 13 bankruptcy depends on various factors, including your income, assets, and debts. Consulting with a bankruptcy attorney will help determine which chapter suits your circumstances.
Q: Can I keep my house and car if I file for bankruptcy?
A: Chapter 7 bankruptcy allows you to keep certain exempt assets, including your primary residence and vehicle, up to a certain value. Chapter 13 bankruptcy is designed to help debtors catch up on missed mortgage or car loan payments and retain their assets.
Q: Can all debts be discharged in bankruptcy?
A: While bankruptcy can discharge most unsecured debts, certain obligations are generally non-dischargeable, such as student loans, child support, alimony, and some tax debts.
Q: Will bankruptcy stop creditor harassment and wage garnishment?
A: Filing for bankruptcy triggers an automatic stay, which prohibits creditors from taking any collection actions, including wage garnishment or harassing phone calls.
In conclusion, Chapter 7 and 13 bankruptcy serve different purposes and cater to individuals with varying financial situations. Chapter 7 provides a fresh start by eliminating most unsecured debts, while Chapter 13 allows debtors to reorganize their finances and repay their debts over time. It is essential to consult with a qualified bankruptcy attorney to understand the best option for your specific circumstances.