You may qualify for bankruptcy protection if you are falling behind on payments, racking up debt, and barely making your minimum payments. Bankruptcy laws were enacted for such situations, but the process can seem daunting and confusing.
You should know that there are different types of bankruptcies, and you must qualify for them. In this post, we will walk you through the differences between the two main chapters of bankruptcy—Chapter 7 and Chapter 13—so you can better understand which one might be right for you.
Understanding Bankruptcy
Bankruptcy is a legal process to relieve individuals and businesses struggling with overwhelming debt. It allows you to either eliminate your debts or create a plan to repay them over time. There are various chapters under which you can file for bankruptcy, but the most common for individuals are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often called “complete liquidation,” is designed for individuals with limited resources struggling with unsecured debt, like credit card bills, medical bills, and personal loans. Despite its name, assets are not liquidated in 95% of Chapter 7 cases.
Who Qualifies for Chapter 7?
Most people who file for Chapter 7 have limited income and few assets. If you have excessive credit card debt, are under a certain income level, and have little to no equity in your home, you are likely a candidate for Chapter 7. To qualify, you will need to pass a means test assessing your financial situation.
Benefits of Chapter 7
- Eliminates Unsecured Debt: Chapter 7 can discharge most of your unsecured debts, giving you a clean slate.
- Quick Process: The entire process usually takes about six months from filing to discharge.
- No Repayment Plan: Unlike Chapter 13, no repayment plan is required.
Drawbacks of Chapter 7
- Impact on Credit: Chapter 7 bankruptcy will stay on your credit report for up to 10 years.
- Asset Liquidation Risk: Although rare, there is a possibility that some of your assets could be liquidated.
- Eligibility Restrictions: You can only file for Chapter 7 once every eight years.
Chapter 13 Bankruptcy
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is designed for individuals who have a steady income and want to keep their assets while repaying some or all their debts over time. Instead of wiping out debt immediately, Chapter 13 sets up a repayment plan that spans three to five years.
Who Qualifies for Chapter 13?
Chapter 13 is suitable for individuals who have a significant amount of equity in their homes or who earn over a certain income level. You will need to have a source of income to propose a feasible repayment plan to the court.
Benefits of Chapter 13
- Asset Protection: You can keep your home, car, and other assets while repaying your debts.
- Structured Repayment: The repayment plan can be more manageable than your original debt terms.
- Credit Rebuilding: While Chapter 13 stays on your credit report for seven years, it provides a structured way to rebuild your credit.
Drawbacks of Chapter 13
- Long-term Commitment: The repayment plan requires a commitment of three to five years.
- Higher Failure Rate: Chapter 13 has a higher failure rate due to the strict adherence to the repayment plan.
- Court Supervision: You may need court approval for major financial decisions, like financing a car or a home.
Key Differences Between Chapter 7 and Chapter 13
- Debt Discharge vs. Repayment Plan: Chapter 7 eliminates unsecured debt quickly, while Chapter 13 involves a repayment plan over several years.
- Asset Liquidation: Chapter 7 may involve liquidating assets, though it is rare. Chapter 13 allows you to keep your property.
- Income Requirements: Chapter 7 requires passing a means test based on your income, while Chapter 13 requires a steady income to propose a repayment plan.
- Credit Impact: Chapter 7 stays on your credit report for 10 years, whereas Chapter 13 stays for seven years.
Our Experienced Bankruptcy Team Can Help
Understanding the differences between Chapter 7 and Chapter 13 bankruptcy can help you make an informed decision about which option is best for your financial situation. If you are facing financial constraints and are late on payments, it might be time to consider bankruptcy as a fresh start.
Before making any decisions, it’s essential to consult with an experienced bankruptcy attorney who can guide you through the process and help you determine which chapter of bankruptcy you qualify for.
Ready to take the next step? Schedule a consultation with our experienced team to discuss your options and find the best path to financial relief. Do not wait until it becomes too stressful—act now and secure your financial future.
