Chapter 7 vs. Chapter 13

For consumers, having a basic understanding of bankruptcy is important, particularly for those considering filing for it. Bankruptcy is a complicated legal process and can be very confusing, but the more you learn, the better prepared you should be to make smart decisions about bankruptcy. One of the most fundamental and important details about bankruptcy for consumers to understand is the different types – namely Chapter 7 and Chapter 13. There are many important differences between Chapter 7 and Chapter 13 bankruptcies that must be taken in consideration when making a decision about bankruptcy. This article will provide a basic overview of some of the important differences between the two chapters.

What Happens?

In a Chapter 7 bankruptcy, the consumer filing for bankruptcy essentially requests for the court to discharge some portion of their debts. Discharge means the debts covered are gone, never to be pursued by collectors or creditors again. In exchange for discharging debts, the court can repossess the consumer’s property and sell it, distributing the proceeds of the sale to any unpaid creditors.

In a Chapter 13 bankruptcy, the consumer filing for bankruptcy essentially requests a repayment plan that eventually leads to a discharge. Instead of asking the court to get rid of their debts immediately, consumers ask to make their debts more manageable, so that they can pay them back in time. The court has the power to reduce the amount of debts and extend the amount of time allowed to pay them back. For a consumer with steady income, this can make it much easier to pay back debts.

Property

Property is an extremely important consideration when it comes to bankruptcy. Your property is likely precious to you, so understanding what will happen to it during a bankruptcy certainly should not be overlooked.  A Chapter 7 basically mandates that you give up some of your property, if you have any, to pay back delinquent debts. There are exemptions – sometimes your home, clothing and other low-priced personal property, retirement plans – but most forms of property can and will be taken by the court. In a Chapter 13, on the other hand, you will lose no property. A Chapter 13 assumes you have an income, and that’s what will be taken from you. You will generally be able to keep your home, car, and just about everything else, except for part of your income.

Eligibility

To file for bankruptcy, whether it’s Chapter 7 or Chapter 13, eligibility is key. If you are not eligible, you will not be able to proceed through the process. Each type of bankruptcy has its own eligibility requirements.

To qualify for Chapter 7 bankruptcy, you must:

• Be an individual, partnership, corporation or other business entity. As long as you fall under one of these categories, you can file a Chapter 7. However, not all categories are eligible for discharge under bankruptcy law.
• Pass the means test. The means test determines ability to pay debts. If you pass the means test, it means income and assets are low enough that you can file for a Chapter 7.
• Complete Credit Counseling. Under new laws, credit counseling is a course that is required of all people who file Chapter 7. Credit counseling helps educate consumers on debt management and budgeting.

To qualify for Chapter 13 bankruptcy, you must:

• Be an individual. Only individuals can file for Chapter 13. Individuals owning a business can claim their business in their filing, but cannot file as a business.
• Have disposable income. You need money to repay your debts, so a Chapter 13 repayment plan will require that you can confirm a steady source of disposable income.
• Have debts below the allowable limit. Individual debtors need to have unsecured debts below $360,475 and secured debts below $1,081,400 to file Chapter 13.

When do people use Chapter 7 vs. Chapter 13?

There’s definitely no single rule or condition that determines which type of bankruptcy is best for you. There are certain cases where one has a clear advantage over the other. Often times, the decision to use Chapter 7 or Chapter 13 hinges on eligibility – especially related to income, property, and the means test. When choosing between Chapter 7 and Chapter 13, it is also important to consider what will happen to your property and home equity, as well as the impact it will have on your financial health.