Chapter 7 vs Chapter 13
For the majority of individuals looking to file bankruptcy, there are two main personal bankruptcy options: Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Deciding which is the right option for you depends on a number of circumstances, including how much debt you have, your level of income, and whether you have any valuable property you’d like to keep.
First some basics: Chapter 7 bankruptcy is designed to eliminate unsecured debts, and may provide a complete discharge of debts related to credit cards, medical bills, payday loans and most personal loans.
Chapter 7 involves liquidation of assets—however, most Chapter 7 cases don’t involve liquidation, because bankruptcy allows you to keep some property, known as exemptions.
Benefits of Chapter 7 generally include:
- Forgiveness of unsecured debts
- Protection against creditors
- Fairly fast process (typically takes 6-9 months)
Chapter 13 bankruptcy is a structured repayment of debts, and is designed for those with a regular source of income and secured debts, like a mortgage or auto loan. The bankruptcy court works with you and your creditors to create a budget and a payment plan, which may include only a portion of your actual debts.
The Chapter 13 repayment plan lasts three to five years, during which time you will make regular monthly payments for past-due debts to the bankruptcy court—not your creditors.
Benefits of Chapter 13 generally include:
- Protection of property, including house and car
- Protection for co-signers on debts
- Payments to bankruptcy trustee and not creditors
Both bankruptcy chapters provide the protection of the automatic stay—a court-order that typically prevents creditors from attempting to collect on debts. The automatic stay can last for the duration of the bankruptcy case, providing protection from when you file until you receive your debt discharge.
Means Test
One major element in the choice between Chapter 7 bankruptcy and Chapter 13 bankruptcy is the means test. This test is used to determine whether a complete debt discharge under Chapter 7 bankruptcy could be an abuse of bankruptcy’s powers.
The bankruptcy means test looks at your income and compares it to the median income of your state. If you fall below the median income level, you are typically allowed to file for Chapter 7 bankruptcy.
However, if your income level is above the median, the court looks at your disposable income in relation to your level of unsecured debts. If your disposable income, after certain allowable expenses, is enough to satisfy your debts in a Chapter 13 repayment plan, the court will typically recommend you file a Chapter 13 bankruptcy, or may dismiss your case.
Because the bankruptcy means test is a complicated—and mandatory—process, you may wish to work with a local bankruptcy attorney to help guide you through the process.
Requirements for Chapter 13 bankruptcy are less strict. To file under Chapter, an individual must have unsecured debts less than $336,900 and secured debts less than $1,010,650.
The above summary of personal bankruptcy laws is by no means all-inclusive and is not intended to serve as legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.
Tags: chapter 13, chapter 7