If you’re considering filing bankruptcy, choosing between chapters is one of the most important decisions you can make. It may mean the difference between losing your debt and losing your assets.
The following is an overview of each chapter. Once you understand the major differences between them, you will be better equipped to determine which chapter is right for your financial crisis.
Chapter 7: Liquidation Bankruptcy
Chapter 7 is called liquidation bankruptcy because, in a matter of months, the trustee takes ownership of your nonexempt assets, sells them, and uses the proceeds to repay your creditors. Therefore, Chapter 7 is best for debtors in dire financial straits who own only what is necessary for them to live a normal life.
If you have multiple vehicles, a vacation home, or other high-value possessions, you will likely lose these in Chapter 7 bankruptcy. If, on the other hand, you have very few assets, you may be able to file a “no-asset” case, meaning you can claim all of your property through bankruptcy exemptions. State and federal laws outline exactly what assets (and levels of equity) you can protect from the liquidation process, which can help you predict what you will own after filing.
There is no minimum or maximum amount of debt you can owe to qualify for Chapter 7, but you will have to demonstrate your eligibility through a means test. Generally, you will qualify for Chapter 7 if your income is below your state’s median income for a household of your size. If it is higher, you will have to undergo more complex calculations that take your assets, expenses, and debt into account.
Chapter 7 is available to individuals, sole proprietors, and business entities. The entire process takes roughly 4-6 months.
Chapter 13: Debt Reorganization
Chapter 13 does not involve a liquidation process. Instead, you will propose a repayment plan, in which you will make monthly payments to the bankruptcy trustee for 3-5 years. The size of these payments will correspond with your disposable income and expenses.
Chapter 13 may be a viable solution for those who:
- Cannot qualify for Chapter 7;
- Have fallen behind on non-dischargeable debt (e.g. tax debt, alimony, mortgage debt, etc.) and can catch up on these missed payments during the 3-5-year plan;
- Own assets they would not be able to protect through exemption laws; and/or
- Have a stable enough income to make monthly payments.
You must be fully prepared to make all required payments—if you can’t, the court may convert your case to a Chapter 7 filing, and you could lose the assets you tried to protect by filing Chapter 13. If you complete the plan, however, you can keep property attached to secured debt (e.g. your home) as long as you caught up on arrears. For this reason, many people file Chapter 13 to avoid losing their homes or vehicles to foreclosure or repossession.
Unlike Chapter 7, Chapter 13 has a debt threshold. You cannot file Chapter 13 if you owe more than $419,275 in unsecured debt (e.g. credit card debt, personal loans, medical bills, etc.) and/or $1,257,850 in secured debt (e.g. mortgages, auto loans, etc.).
Chapter 13 is available only to individuals and sole proprietors. The entire process takes the length of the repayment plan (3-5 years).
How Are Chapters 7 and 13 Similar?
Despite their differences, Chapters 7 and 13 have many of the same effects on the filer.
These similarities include:
- The automatic stay. All forms of bankruptcy trigger the automatic stay, a court order that immediately halts and prevents collection activities (e.g. calls, letters, repossession, foreclosure, lawsuits, etc.).
- The debt discharge. While it occurs within 4-6 months for Chapter 7 and 3-5 years for Chapter 13, both chapters allow for a final debt discharge. This is a court order that eliminates the filer’s liability for any unsecured debt that remains after either the liquidation process (in Chapter 7) or the completed repayment plan (in Chapter 13). Neither chapter, however, can eliminate secured debt.
- A potentially negative impact on credit. Both chapters may lower the filer’s credit score and will remain on their report for several years. Chapter 13 has a smaller impact, however, remaining on the report for only 7 years, compared to 10 years for Chapter 7.
The general goal of bankruptcy is the same across all chapters: to provide a clean state for individuals, families, and businesses struggling to make ends meet because of their debt. Ultimately, the most appropriate chapter will depend on a host of factors within your unique financial situation.
Get in Touch with Us Today to Learn More
Do you need help determining which chapter is best, or if bankruptcy is the right solution in the first place? Hurtik Law & Associates is fully prepared to provide the personalized, one-on-one attention you need. We can work closely with you to analyze your financial situation and determine your goals, which will then allow us to select the best possible solution.