What are the Differences Between Chapter 7 and Chapter 13 Bankruptcies?

United States law gives consumers the right to eliminate debt through bankruptcy. Individuals have a choice between Chapter 7 and Chapter 13 bankruptcy. Which one you choose depends on the state of your debts and income. Not all debtors qualify for Chapter 7, so Chapter 13 is often a better option.

How Bankruptcy Works

Bankruptcy is a legal process overseen by a United States federal court that protects you from financial ruin when you have overwhelming debt. Successful completion of the bankruptcy process can reduce or fully discharge consumer debts. Debts that bankruptcy can help resolve include:
• Credit card balances
• Rent and utilities
• Medical bills

Bankruptcy doesn’t discharge all debts. You won’t be able to discharge child support or alimony, unpaid taxes and some student loans.

Why File Chapter 7 Bankruptcy?

You can qualify for Chapter 7 via two measures. If you have income that falls under your community’s median, you qualify. However, you must pass the means test if it’s above that level. This test measures your household income and expenses to those in your community. If your income exceeds a legal threshold, you must demonstrate exceptional circumstances. Those who cannot do so do not qualify and must proceed to Chapter 13.

Chapter 7 is sometimes called liquidation bankruptcy. Its main feature is the liquidation of non-exempt assets. A court-appointed trustee sells these assets to help pay your debts as much as possible. The trustee evaluates your assets to determine which one to sell. Under this bankruptcy filing, you may give up a significant portion of your accumulated wealth. The proceeds from the sale of these assets are used to pay your creditors. The court typically discharges the remainder of your debt.

Why File Chapter 13 Bankruptcy?

Individuals who do not pass the means test can only file for Chapter 13 bankruptcy, but some Debtors only consider this option. Chapter 13 works differently because it allows debtors to protect certain assets from bankruptcy. Individuals choose this route when they want to protect their assets. Under this plan, you must demonstrate to the court that you have a steady income, as this filing focuses on repayment. You’ll also need to provide the court with your monthly expenses. From there, the court-appointed trustee will develop a payment plan that lasts three to five years. Factors like the amount and types of debts and the value of your property determine your payment amount. When You choose this filing, you can usually keep your home if you own one.

The Differences Between Chapter 7 and Chapter 13

You won’t repay all of your debts with either type of filing type. While Chapter 7 wipes the slate clean for debtors, you receive a discharge within three to five months. The bankruptcy will stay on your credit report for up to 10 years. With Chapter 13, you’ll get a discharge within three to five years, and the bankruptcy will affect your credit for up to seven years.