Approaching bankruptcy, the first and most essential step is to understand the options open to you. These are usually the most significant chapters within personal bankruptcy: Chapter 7 and Chapter 13. Each has pros, cons, eligibility, and future implications. The specific one that would be right for you is determined by your financial conditions, assets, and future ends.
Here is a summary of the main differences found between Chapter 7 and Chapter 13 to guide you in determining which may be the best for your case.
What Is Chapter 7 Bankruptcy?
Often referred to as ‘liquidation bankruptcy’, Chapter 7 allows individuals to instantly deconstruct the majority of their unsecured debts, such as credit cards, personal loans, and medical debts, then quickly, without a repayment plan.
Key Features of Chapter 7
- Speedy Process: Time frame of 3-6 months.
- No Repayment Plan: Most debts vanish without a requirement to pay for them.
- Liquidation of Assets: Non-exempt assets may be sold to pay off creditors. But many people who file for Chapter 7 do not lose any property due to state or federal exemptions.
- Income Requirement: You have to pass a means test to qualify, which checks your income against the median income of your state.
Best For:
- Those with low income and hardly any valuable assets.
- People are facing aggressive collection actions with garnishments from their wages.
- People who would like to start anew in a very short time.
What is Chapter 13 Bankruptcy?
Chapter 13 is called the “wage earner’s plan.” Instead of liquidating assets, you develop a repayment plan over three to five years with the help of the court to pay back some or all of your debts.
Key Characteristics of Chapter 13
- Reorganization of Debt: You make monthly payments depending on your income, as well as your living expenses and the amount of your debt.
- Asset Protection: Retain your home, car, and other valuables, even if behind on payments.
- Long-term Relief: Remaining unsecured debts are discharged at the end of the repayment plan.
- Flexible Eligibility: No upper limit on income, but must fall within certain thresholds for total debts.
Best For:
Steady income earners who will be able to pay over time.
- People want to catch up on mortgage or car payments, hoping to avoid foreclosure or repossession.
- Individuals whose situation does not qualify them for Chapter 7 or who want to protect more assets.
This post was written by Trey Wright, a Chapter 11 Bankruptcy Lawyer in Jacksonville, FL! Trey is one of the founding partners of Bruner Wright, P.A., Attorneys at Law, specializing in bankruptcy law, estate planning, and business litigation.
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