Understanding the Differences Between Chapter 7 and Chapter 13 Bankruptcy
Bankruptcy is a legitimate way to steer an individual or a business organization out of a financial crisis. We often come across the terms Chapter 7 and Chapter 13, which essentially represents two different ways to file bankruptcy. These chapters are derived from the U.S Bankruptcy Code, with each having distinct provisions and undergoing different proceedings.
A Look at Chapter 7 Bankruptcy
Chapter 7 bankruptcy, popularly known as "Liquidation Bankruptcy," this form of filing predominantly involves liquidating all non-exempt assets of the debtor to pay off outstanding debts. These non-exempt assets could range from vehicles, property, and various other assets. For instance, if you filed for Chapter 7 bankruptcy and owned two vehicles, one of them could potentially be exempt, while the other is sold to pay off the creditors.
It is important to note that not all debts can be discharged through Chapter 7 bankruptcy. Debts like child support, alimony, and certain tax debts cannot be wiped out. However, secured and unsecured debts like medical bills, credit card bills, personal loans, and others can be discharged.
To qualify for Chapter 7 bankruptcy, the individual must pass the "means test." This is a complex calculation that weighs your income, family size, expenses, and debts to determine if you have the means to pay off your debts.
Once you pass the means test and file for Chapter 7 bankruptcy, an automatic stay comes into effect, which temporarily prohibits creditors from collecting debts.
The Chapter 13 Bankruptcy Explained
Chapter 13 bankruptcy, often referred to as "Wage Earner's Bankruptcy", is typically designed for individuals who have regular income but struggle to keep up with their debt obligations. Instead of liquidating assets, Chapter 13 involves creating a repayment plan to pay off the debts over three to five years.
A significant advantage of Chapter 13 is the ability to save your home from foreclosure. As soon as you file for Chapter 13, an automatic stay commences which halts all foreclosure proceedings. If you manage to make all the payments required under your repayment plan, you can avoid foreclosure altogether.
Unlike Chapter 7, there isn't a means test for Chapter 13. But there is a debt limit. As of April 2021, you cannot file for Chapter 13 if your unsecured debts are above $419,275 and secured debts are more than $1,257,850.
The Clear Differences Between Chapter 7 and Chapter 13 Bankruptcy
Although Chapter 7 and Chapter 13 are both types of personal bankruptcy, they do have significant differences:
Time Involved
Chapter 7 bankruptcy is a relatively quick process and typically gets completed within 4 to 6 months of filing. On the other hand, the completion of Chapter 13 bankruptcy involves the successful completion of the payment plan that typically lasts three to five years.
Keeping Your Property
In Chapter 7 bankruptcy, you might lose some of your non-exempt property, which will be sold to repay your creditors. However, in Chapter 13 bankruptcy, you get to keep all your property but have to pay creditors the value of your non-exempt assets via your repayment plan over time.
Unsecured Debts
Chapter 7 is efficient in wiping out general unsecured debts like credit card bills or medical expenses. However, there are certain debts, like student loans, most tax debts, and domestic support obligations, that are not discharged. While in Chapter 13, even though you'll be required to pay some or all of these debts through your repayment plan, when your repayment plan is complete, these debts are discharged.
Impact on Your Credit
Both Chapter 7 and Chapter 13 bankruptcies have a significant negative impact on your credit score. However, Chapter 13 might be slightly better for your credit since you're repaying some of your debt. Chapter 7 bankruptcy stays on your credit report for ten years, whereas Chapter 13 stays for seven years.
Eligibility Requirements
While deciding to declare any form of Bankruptcy, your eligibility matters. For Chapter 7, you'll need to pass the means test. But for Chapter 13, your fixed debts need to be under a certain limit.
Choosing the Right Bankruptcy for Your Needs
The decision to file bankruptcy is a serious one and depends largely on your unique financial situation. Here's what you should consider when making the decision:
Consult a bankruptcy lawyer
A skilled bankruptcy lawyer can provide you with invaluable advice about which form of bankruptcy is right for your specific scenario. They can assess your assets, debts, and financial goals to create a suitable plan of action.
Scrutinize your finances
Evaluate all your assets, liabilities, income, and expenses. This will provide a clearer picture of your financial health and whether bankruptcy is the best choice for you.
Consider your future financial goals
Between Chapter 7 and Chapter 13, the bankruptcy that's best for you mainly depends on your future financial goals. If you wish to discharge your debts quickly and start anew, Chapter 7 might be your best choice. If your priority is retaining your non-exempt assets, then Chapter 13 may be the way to go.
Both Chapter 7 and Chapter 13 bankruptcy are equipped to provide you relief from mounting debts and provide a fresh start. However, before making the decision, it's crucial to weigh the pros and cons of each chapter and seek professional advice.
Navigating the Maze of Bankruptcy
Understanding the different types of bankruptcy is a crucial first step to navigate the complex domain of bankruptcy. Both Chapter 7 and Chapter 13 bankruptcy come with their set of advantages and disadvantages. It’s essential to consider your individual financial circumstances, long-term implications, and legal advice before deciding on a bankruptcy chapter.
Bankruptcy might seem like a daunting process, and it indeed is a serious legal procedure that can significantly impact your financial life. However, it is also an opportunity to wipe the financial slate clean and start afresh. Understanding the specifics of each bankruptcy type will guide you in making the right decision, providing you a lifeline to financial recovery and growth.
