How does Chapter 13 Bankruptcy differ from Chapter 7?
Filing for personal bankruptcy can be a difficult decision to make — and it’s important to understand the differences between the two types of bankruptcy before deciding. Chapter 13 and Chapter 7 bankruptcies both offer debt relief, but they are two entirely unique processes and each has its qualification requirements, set of debtor obligations, and impact on credit score. For individuals looking to file for personal bankruptcy, it’s critical to understand the differences between chapter 13 and chapter 7 to choose the best option for their needs.
Introduction
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a type of reorganization bankruptcy in which debtors propose a repayment plan to pay off their debts over a period of 3–5 years. To be eligible for Chapter 13 bankruptcy, debtors must have a regular source of income, have unsecured debts that are less than $419,275 and secured debts that are less than $1,257,850. Debtors must also have filed all required tax returns for the past four years to qualify for Chapter 13 bankruptcy.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a type of liquidation bankruptcy in which debtors can discharge most of their unsecured debts. To be eligible for Chapter 7 bankruptcy, debtors must usually pass a means test, which determines their eligibility based on their income and ability to pay back debts. Additionally, debtors cannot have more than $1,257,850 in secured debts or $419,275 in unsecured debts to qualify for Chapter 7 bankruptcy.
Key Differences between Chapter 13 and Chapter 7 Bankruptcy
Eligibility for Chapter 13 and Chapter 7 Bankruptcy
The qualification requirements for filing under Chapter 13 and Chapter 7 bankruptcy can vary depending on the debtor’s financial situation. Generally, most individuals who earn an income that is below the median income in their state will be eligible for Chapter 7 bankruptcy. However, finding yourself above the median income line, does not automatically disqualify you from a Chapter 7 Bankruptcy. Furthermore, those with a significant amount of unsecured debt may not be eligible for Chapter 13 bankruptcy. It’s important for individuals to understand the qualification requirements for each type of bankruptcy before deciding on which one to pursue. Recent bankruptcy filings may also affect your rights and eligibility for these two types of Bankruptcy.
Repayment Plans under Chapter 13 vs. Chapter 7 Bankruptcy
Under Chapter 13 bankruptcy, debtors are required to submit a repayment plan that details how they will pay back their creditors over 3–5 years. Debtors must make regular payments on time to remain eligible for the repayment plan. If debtors are unable to make payments or fail to follow the repayment plan, their case may be dismissed or converted into a Chapter 7 case.
Under Chapter 7 bankruptcy, creditors are not repaid through a repayment plan — instead, the debtor’s non-exempt assets are liquidated and used to pay off as many of their debts as possible. This is not as scary as it sounds, as most debtors can keep their home, car, furniture, retirement accounts, and other assets. Any remaining debts after liquidation are discharged without any further payment from the debtor.
Debt Discharge under Chapter 13 vs. Chapter 7 Bankruptcy
In addition to repaying some or all of their debts under a repayment plan, debtors in Chapter 13 bankruptcy may also be able to discharge certain types of debts after completing the repayment plan. This includes certain types of unsecured debts such as credit card debt, medical bills, and personal loans. Other debts, such as student loans and taxes may not be eligible for discharge under Chapter 13 bankruptcy. However, many debts that would not be subject to a Bankruptcy discharge can be paid through the Chapter 13 plan in a way that is often easier than dealing directly with the creditor.
Under Chapter 7 bankruptcy, most types of unsecured debts including credit card debt, medical bills, and personal loans can be discharged without any further payment from the debtor. However, certain types of debts such as taxes and student loans may still need to be paid back by the debtor even after filing for Chapter 7 bankruptcy.
Impact on Credit Score under Chapter 13 vs. Chapter 7 Bankruptcy
Filing for either type of bankruptcy can have an immediate negative impact on a debtor’s credit score. However, it’s important to remember that this is only temporary and can be improved over time (and frequently in a short period of time) with good financial habits. Generally, individuals who file for Chapter 13 bankruptcy may experience less of an immediate drop in their credit score due to their repayment plan — however, this can still take several years before their credit score is fully restored. On the other hand, individuals who file for Chapter 7 bankruptcy may experience a larger immediate drop in their credit score — however, this can improve more quickly with responsible financial management and responsible use of credit cards post-bankruptcy.
Conclusion
Deciding whether to file for Chapter 13 or Chapter 7 bankruptcy depends on each individual’s financial situation — there is no one-size-fits-all solution when it comes to filing for personal bankruptcy. Individuals should carefully consider their goals and assess their financial situation before deciding on which type of bankruptcy to pursue. It’s also important to seek legal advice from an experienced bankruptcy attorney who can help guide you through the process and ensure that all necessary steps are taken to maximize your chances of obtaining debt relief.
