March 11, 2020
The idea of filing for bankruptcy can be an intimidating process. It can be scary when you’re unsure of the consequences of filing, how it can affect your future or which bankruptcy to file for.
Per the U.S. Bankruptcy Code, there are six chapters of different bankruptcies that an individual can file under.
Typically, these types of bankruptcies apply to debtors based on criteria that qualify them to file.
If you happen to find yourself in serious debt, you are likely to file for Chapter 7 or Chapter 13 bankruptcy.
In this blog post, we break down the basics of Chapter 7 and Chapter 13, how to know which one you qualify for and the benefits of each chapter.
Chapter 7 Bankruptcy
This type of bankruptcy, also known as liquidation, is the most common and basic type. It’s for those who are in very serious debt with limited incomes.
Chapter 7 liquidates all of your assets to pay off the debt that you are unable to pay.
The liquidation of this property is paid to creditors, clearing you of whatever debt you have accrued and are unable to pay otherwise.
However, because of a number of exemptions that may apply, a vast majority of Chapter 7 cases do not require the sale of any of your property.
This process will usually take 3 to 5 months to clear all debts, giving the debtor a fresh start and wiping their slate of unsecured debts.
To become eligible for liquidation under Chapter 7 bankruptcy, a debtor will either have a household income below the state’s median level, or they undergo a “means test”.
Because Chapter 7 is typically reserved for people with limited income who are unable to pay back any of their debts, the “means test” determines whether they have enough disposable income to repay some or all of those debts.
So, if the household income falls below state levels, or living expenses exceed the income, debtors become eligible for Chapter 7 liquidation.
If they have enough means (assets, property, etc.) to pay off some of their debt, or make too much income, they will be required to file for Chapter 13 bankruptcy.
Chapter 13 Bankruptcy
Chapter 13, or wage earner’s plan, is a type of bankruptcy that develops a repayment plan for debtors with a regular income.
Typically completed in the span of 3 to 5 years, filing for this chapter will enable a debtor to pay off creditors through a trustee-distributed payment plan.
Unlike Chapter 7, this filing will protect your property (including nonexempt property) from repossession and your house from foreclosure.
After a debtor successfully completes the court-mandated repayment plan, unsecured debts have the potential to be dismissed.
To become eligible to file for Chapter 13, debtors must have a regular income and have unsecured and secured debts that are less than $394,725 and $1,184,200, respectively.
Unsecured debts are those that are not backed by or tied to any tangible collateral or asset. Medical debt and credit card debt are the most common types of unsecured debt.
Unlike unsecured debts, secured debts are borrowed with collateral. This means that a debtor took out a loan with a tangible asset as collateral.
For example, a house and a car can be collateral for a mortgage and auto loan.
Advantages and Disadvantages of Chapter 7 and Chapter 13
Filers of both Chapter 7 and Chapter 13 have the potential to be “discharged” of unsecured debts. This means that filers can be cleared of any outstanding debt that falls within the realm of each chapter, giving them a new beginning.
In the case of Chapter 7, filing can quickly give debtors a fresh start, relieving them of their unpaid debts.
However, filers of liquidation bankruptcy have the potential to lose most of their nonexempt property for resale by bankruptcy trustees.
Unlike Chapter 13, Chapter 7 doesn’t give debtors a way to catch up on repayments to avoid repossession or foreclosure.
Chapter 13 offers repayment plans that allow debtors to keep their property and catch up on payments for their secured debts. In most cases, filers of wage earner’s plan will be cleared of their unsecured debts.
Chapter 13’s repayment plans will keep your property protected and relieve you of unsecured debts when the payment plan is completed.
Affecting Your Credit Score
In any case, filing for either chapter of bankruptcy will lower your credit score, making it more difficult to get any kind of loan. However, applying for a loan with a discharge on your credit isn’t impossible.
If you have a bankruptcy on your credit record, you are just more likely to receive loans at a higher interest rate.
Bankruptcies stay on your credit report for a number of years. Typically, a Chapter 7 filing will remain for ten years while a Chapter 13 will remain for seven years.
Hiring A Qualified Bankruptcy Attorney
Speaking with a qualified lawyer can protect you from losing property and assets. If you’re considering filing for bankruptcy, be sure to get in touch with a professional bankruptcy lawyer to determine your best financial options.