There are several types of bankruptcy. Two of the most popular ones are chapter 7 bankruptcy and chapter 13 bankruptcy. For those who are going to file for bankruptcy, you need to learn about the differences between these types of bankruptcy so that you can make a good decision. So, what are the differences between chapter 7 bankruptcy and chapter 13 bankruptcy?
Differences between Chapter 7 Bankruptcy vs Chapter 13 Bankruptcy
There are some differences between chapter 7 bankruptcy and chapter 13 bankruptcy, as follows:
Definition:
Chapter 7 bankruptcy
Chapter 7 bankruptcy is described as the type of bankruptcy that is created for those who fail to pay off their debts. This one is also known as liquidation or straight bankruptcy. Under this chapter of bankruptcy, it is possible for you to be discharged or to not pay a number of unsecured debts, including personal loans, medical bills, and credit card debt.
Chapter 13 bankruptcy
Chapter 13 bankruptcy refers to the type of bankruptcy that is designed for those who have regular income and have the ability to pay off their debts over time. With this chapter, they are allowed to reorganize their debts and create a repayment plan that can last up to five years. It means it is not about liquidating assets.
Process:
Chapter 7 bankruptcy
If you choose chapter 7 bankruptcy, your assets will be evaluated by a trustee that has been appointed by the court. In order to repay your debts to the creditors, property that is not protected by bankruptcy exemptions, which are also known as non-exempt assets, can be sold or liquidated. However, it is possible for you to keep most or all of your property because a few things such as a primary residence, a vehicle, and personal belongings are usually counted as exemptions.
Chapter 13 bankruptcy
For anyone who files for chapter 13 bankruptcy, you can propose a repayment plan to the bankruptcy court, highlighting that you will pay off your debts over a certain period of time. It is a must for the plan to be approved by the court. Once the court has given the approval, any remaining unsecured debts usually do not have to be paid.
Eligibility:
Chapter 7 bankruptcy
Apparently, the “mean test” is used to determine whether or not you are eligible for chapter 7 bankruptcy. In case you are not familiar with this test, it is the one that will compare your income to the median income in your state. There is a high chance of you qualifying for this chapter if your income is under the state median. However, if it is above the state median, you will have to go through a more detailed means test analysis.
Chapter 13 bankruptcy
If you want to qualify for chapter 13 bankruptcy, it is a must for you to have a regular income. Aside from that, it is required for your secured and unsecured debts to fall within specific limits. For anyone who is wondering about the limits, they are approximately $2.75 million for both secured and unsecured ones as of 2024. While chapter 7 bankruptcy has a mean test, chapter 13 bankruptcy does not. However, remember that it is a must for your repayment plan to reflect your ability to pay.
Pros and cons:
Chapter 7 bankruptcy
Pros:
Chapter 7 bankruptcy has quick resolution. Usually, it takes three to six months for chapter 7 bankruptcy cases to be completed. If you choose this type of bankruptcy, most unsecured debts will be discharged. Besides, you will not have to pay off your debts over time as there is no repayment plan.
Cons:
One of the bad points of chapter 7 bankruptcy is you may lose your non-exempt property because they can be sold. The impact of this type of bankruptcy has a longer impact on your credit report. It can last for a maximum of ten years. Apparently, not every debt can be discharged, meaning there are debts that you will have to pay, including student loans, child support, and recent tax obligations.
Chapter 13 bankruptcy
Pros:
By choosing chapter 13 bankruptcy, you are able to keep your property, including non-exempt assets, as long as you do not break the repayment plan. If you have remaining unsecured debts, there is a chance for them to be discharged after you have successfully completed the plan. Unlike chapter 7 bankruptcy that stays on your credit report for seven years, this thing will only stay for ten years in your credit report if you choose chapter 13 bankruptcy.
Cons:
The first drawback of chapter 13 bankruptcy is that its process is longer compared to chapter 7 bankruptcy. Usually, the repayment plan lasts three to five years. It means it requires a long-term commitment. Apart from the long-term commitment, it also requires regular payments. If you miss payments, do not get surprised if your case is dismissed or converted to chapter 7 bankruptcy. Another thing that makes chapter 13 bankruptcy not good is the fact that some debts cannot be discharged.
Which is Best for You: Chapter 7 Bankruptcy or Chapter 13 Bankruptcy?
For anyone whose debt is mostly unsecured, whose income cannot cover basic living expenses, or who do not have enough budget to hire an attorney that specializes in bankruptcy cases, it is better for you to consider chapter 7 bankruptcy.
Meanwhile, you are recommended to choose chapter 13 bankruptcy if your money is more than enough to qualify for chapter 7 bankruptcy, you do not want to lose your property, you want to stay in your house by catching up on your mortgage, you have debts that are unlikely to be discharged, you have more than one mortgage, or you owe money to your ex-partner from a property settlement.
Applying for Bankruptcy
Before filing for chapter 7 bankruptcy or chapter 13 bankruptcy, you are required to get a thing called pre-bankruptcy credit counselling. In case you are wondering where to get this, the answer is a credit counselor who has certification approved by the court. In order to get such counseling, you usually will have to pay for around $50. If you cannot afford it, it is possible for you to waive it. During the counselling session, you will learn how to sort out your options. Besides, the counselor will also assist you on the paperwork that must be submitted with your bankruptcy filing.
After completing a credit counselling course, hire a lawyer. While it is possible for you to file a bankruptcy without a lawyer, it is better for you to do it with one. If budget is our issue, contact your state bar association, American Bar Association, or local legal aid clinic to find an affordable lawyer. By contacting them, it is also possible for you to get a free one.
Whether you have a lawyer or not, you will have to file out court-required forms to be able to file for any type of bankruptcy. Keep in mind that you can get every necessary form for free by visiting the official website of U.S. Bankruptcy Court.
Aside from filling out a lot of forms, you should also pay court fees. The fees that you will have to pay usually include basic filing fee, administration fee, and trustee surcharge. If you have low income, you may be able to get these fees waived.
Once you have paid all the fees, it is time for you to file forms with the court. After this stage, there are some other steps that you will have to get through, including meeting with creditors, completing debtor education, and receiving notice of debt discharge.
Bottom Line
In conclusion, chapter 7 bankruptcy and chapter 13 bankruptcy have a few differences. Depending on your financial condition, you can choose either chapter 7 bankruptcy or chapter 13 bankruptcy. Aside from that, it also depends on how you want to pay off your debts. If you want a fast one, chapter 7 bankruptcy is best. Not only fast, it also makes it possible for you to settle your eligible debts. For those who do not want to lose your asset, then chapter 13 bankruptcy is recommended. By choosing this option, you will be able to repay your debts over a few years.
