When it comes to filing for bankruptcy, there are two types that most people consider: Chapter 7 and Chapter 13. Both have their own unique benefits and drawbacks. Understanding the differences between these bankruptcy options is important when deciding which one to choose.
Bankruptcy Protections Explained
Before diving into the differences between Chapter 7 and Chapter 13 bankruptcy, it's important to understand what bankruptcy covers. Bankruptcy is a legal process that allows individuals or businesses to seek relief from their debts when they are unable to pay them back. It's essentially a way for people or businesses to get a fresh start financially by either discharging their debts or creating a repayment plan that works for them. While it can have an impact on your credit score and financial future, it can also provide much-needed relief from overwhelming debt.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is also known as “liquidation” bankruptcy. It involves selling off all your assets (with some exceptions) in order to pay back your creditors. Any remaining debts are typically discharged, meaning you are no longer legally obligated to pay them. One of the biggest advantages of Chapter 7 bankruptcy is that it can provide a clean slate for those who are overwhelmed with debt. It’s often a good option for those with few assets and little income, as they may qualify for a complete discharge of their debts. Not everyone is eligible for Chapter 7 bankruptcy. You must pass a means test, which considers your income and expenses.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, also known as “reorganization” bankruptcy, provides protection from creditors by creating a payment plan to tackle debt. So, instead of selling off all of your assets, as you’d need to in Chapter 7, your bankruptcy attorney would help you create a repayment plan that allows you to pay back your debts over a period of three to five years. This plan is based on your income and expenses. Chapter 13 bankruptcy can often result in lower monthly payments than what you were previously paying before filing.
One advantage of Chapter 13 bankruptcy is that it allows you to keep more assets than Chapter 7. You can also avoid foreclosure or repossession by catching up on missed payments through your repayment plan. However, unlike Chapter 7 bankruptcy, not all debts are dischargeable under Chapter 13. You will still be responsible for paying certain debts such as taxes, student loans, or child support through the repayment plan.
How Will You Know Which Filing is Right for You?
Deciding whether to file for Chapter 7 or Chapter 13 depends on many factors specific to each person’s situation. If you have few assets and low income but significant debt, then chapter seven may be your best option. However, if you have more assets or higher income but want to keep them while repaying debt over time at reduced rates, then consider Chapter 13 instead.
Here are the main differences between Chapter 7 and Chapter 13 bankruptcy:
- Eligibility: Chapter 7 bankruptcy is available to individuals and businesses that pass a means test based on their income and expenses. In contrast, Chapter 13 bankruptcy is available to individuals with a regular income who have unsecured debts and secured debts less than an amount set by Congress.
- Discharge of Debts: In Chapter 7 bankruptcy, most unsecured debts (such as credit card debt and medical bills) can be discharged, while in Chapter 13 bankruptcy, the debtor must repay a portion of their debts for three to five years under a court-approved repayment plan.
- Asset liquidation: In Chapter 7 bankruptcy, non-exempt assets may be sold to repay creditors, while in Chapter 13 bankruptcy, the debtor generally keeps their assets and repays their debts through a court-approved repayment plan.
- Duration: Chapter 7 bankruptcy is typically resolved in a few months, while Chapter 13 bankruptcy lasts for three to five years.
- Credit Report: Both types of bankruptcy will remain on the debtor's credit report for up to ten years, but the impact on the debtor's credit score will lessen over time.
The choice between Chapter 7 and Chapter 13 bankruptcy depends on the debtor's specific financial situation and goals. It’s recommended that anyone considering filing for bankruptcy speak with an experienced attorney who can help them determine which type of bankruptcy would be best suited for their individual needs.
Contact Ryan Legal Services, Inc Today
Consulting with an experienced bankruptcy attorney can ensure you have access to the most accurate, up-to-date information available on current debt limits. An attorney can also advise you on your best course of action if you're struggling with overwhelming debt. Contact Ryan Legal Services, Inc. today to schedule a consultation with our experienced bankruptcy attorney, who will guide you through the process. Take the first step towards a fresh financial start by calling (251) 241-5234 or visiting our website to schedule a consultation.