What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Bankruptcy, while a daunting prospect for many, can offer a lifeline to those drowning in debt. Two of the most common forms of personal bankruptcy are Chapter 7 and Chapter 13. Each has its merits, but how do you know which is suitable for your situation?
The Basics
At its core, Chapter 7 is a liquidation bankruptcy where you seek to discharge most of your debts, while Chapter 13 is a reorganization bankruptcy, where you create a repayment plan to pay back some or all of your debts over a 3-5 year period. The differences are compared below:
Who Qualifies to File for Bankruptcy?
- Chapter 7: This type of bankruptcy is primarily for those with limited incomes who can’t pay back their debts. Applicants must pass a “means test,” ensuring their income is below their state’s median. If it’s above, they may still qualify based on certain expenses.
- Chapter 13: Suitable for individuals with a regular income who can pay back at least a portion of their debts. There are debt limits here – your unsecured debts must be below $419,275, and secured debts should not exceed $1,257,850 (as of 2022, though these figures might be adjusted).
What Happens to Property and Assets?
- Chapter 7: In this method, a bankruptcy trustee is appointed to sell (or “liquidate”) your non-exempt property to repay some of your debt. However, state laws allow for exemptions, ensuring many filers can keep most, if not all, of their property.
- Chapter 13: Here, you don’t have to liquidate assets. Instead, you keep your property and repay creditors through the repayment plan. It’s especially beneficial for those at risk of foreclosure, as they can make up missed payments over time.
How Long Does it Take?
- Chapter 7: This is a relatively quick process, often completed within 3-6 months, allowing the debtor to start rebuilding credit sooner.
- Chapter 13: Given its nature, this process lasts longer, generally 3-5 years, depending on the length of your repayment plan.
What Happens to Debts?
- Chapter 7: Discharges most unsecured debts, including credit card debt, medical bills, and personal loans. However, certain debts like alimony, child support, and most student loans aren’t covered.
- Chapter 13: It addresses a broader range of debts. While it includes those covered by Chapter 7, it also allows debtors to catch up on missed mortgage or car payments, and sometimes, it might reduce or “cram down” certain debts.
What’s the Effect on My Credit?
- Chapter 7: It stays on your credit report for 10 years. Though the impact lessens over time, it’s more significant initially.
- Chapter 13: It remains for 7 years, which is shorter, but you’re in the repayment process for 3-5 of those years.
Choosing Between a Chapter 7 and Chapter 13 Bankruptcy Plan
Deciding between Chapter 7 and Chapter 13 bankruptcy hinges on individual circumstances. It’s essential to consider factors like your income, amount of disposable income, type of debts, and long-term financial goals. While both offer paths to financial relief, they serve different needs. Consultation with a bankruptcy attorney can offer clarity, ensuring you embark on the path best suited for your financial future. Our team of Roanoke bankruptcy attorneys is available to help. For a free consultation, call us today.
