Introduction
Filing for bankruptcy is a significant decision that individuals may face when they are overwhelmed by debt. Among the various bankruptcy options available, Chapter 7 and Chapter 13 are the most common for individuals. Understanding the differences between these two chapters is crucial for making the right choice that suits your specific needs and financial situation. This article provides an overview of Chapter 7 and Chapter 13 bankruptcy, highlighting their key features and eligibility requirements.
Bankruptcy Basics
The U.S. Bankruptcy Code outlines six types of bankruptcy, each named after a chapter in the code. These chapters offer different bankruptcy options depending on the debtor’s circumstances and the nature of their debts. For individuals, Chapter 7 and Chapter 13 bankruptcies are the primary choices. Chapter 11 is more commonly used by businesses but may be suitable for certain individuals in business or sole proprietors. Additionally, Chapter 12 bankruptcy is tailored for family farmers and fishermen, while Chapter 15 is used when bankruptcy cases involve parties from multiple countries.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves the sale of the debtor’s nonexempt assets by a trustee. The proceeds from these liquidated assets are distributed to creditors, and at the end of the process, the filer is relieved of the debt owed to the creditors. However, some assets are exempt from liquidation, such as personal clothing, household furnishings, and, up to a certain dollar value, an automobile. In many Chapter 7 cases, filers only possess exempt assets, resulting in no liquidation and no repayment to creditors.
One of the main advantages of Chapter 7 bankruptcy is that it automatically discharges eligible debts, freeing the debtor from the obligation to repay them. However, certain debts, such as most tax debts, student loans, child support, and alimony debts, are usually non-dischargeable.
To qualify for Chapter 7 bankruptcy, debtors must pass the Means Test, which compares their household income to the median income in their state. Additionally, filers must complete a credit counseling course from an approved provider before obtaining discharges.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 bankruptcy, also known as a wage earner’s plan, is designed for individuals with regular income from a job. It allows debtors to retain valuable assets, like their homes, and create a repayment plan to pay off debts over a period of three to five years. Upon successful completion of the repayment plan, certain types of debt, including those from divorce and some tax obligations, may be discharged.
The key feature of Chapter 13 bankruptcy is the debtor’s commitment to repaying some or all of their debts as specified in the court-approved repayment plan. The plan may include lower interest rates and partial balance forgiveness. Creditors may object to the plan, but once approved, they must accept it.
Eligibility for Chapter 13 bankruptcy is subject to a debt cap, where debtors with unsecured debts less than $394,725 and secured debts less than $1,184,200 are eligible. Due to the complexity of preparing a repayment plan, hiring an attorney to assist with the process is common among Chapter 13 filers.
Choosing the Right Chapter for You
The decision to file for Chapter 7 or Chapter 13 bankruptcy depends on individual circumstances and the nature of the debts. Chapter 7 is suitable for filers with limited income and mostly unsecured debts, such as credit cards and personal loans. On the other hand, Chapter 13 is more suitable for individuals with regular income who wish to retain valuable assets and pay off debts over time. It’s essential to weigh the benefits and drawbacks of each chapter to determine which one aligns best with your financial goals.
Credit Consequences of Bankruptcy
Filing for bankruptcy, regardless of the chapter, has a negative impact on one’s credit. A Chapter 7 bankruptcy remains on the credit report for up to 10 years, while Chapter 13 may appear for up to seven years. However, the seven-year period for Chapter 13 starts after the completion of the repayment plan, which typically takes three to five years.
Lenders may view a Chapter 13 filing as less negative than a Chapter 7 filing because the debtor has demonstrated a commitment to making payments reliably. Rebuilding credit after bankruptcy is possible by using secured credit cards, making timely payments, and showing responsible financial behavior.
Conclusion
Deciding to file for bankruptcy is a significant step towards financial recovery. Understanding the key differences between Chapter 7 and Chapter 13 bankruptcy is essential for making an informed decision. Whether you choose liquidation through Chapter 7 or reorganization through Chapter 13, bankruptcy provides an opportunity for a fresh financial start and a chance to build a more secure future. However, due to the complexities and potential long-term consequences, seeking advice from a qualified attorney is highly recommended before initiating any bankruptcy filing.
