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3 key differences between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Sep 26, 2023 | Bankruptcy |

There are many different types of bankruptcy, each of which can be useful under different circumstances. The average person struggling financially and contemplating bankruptcy may be in a position to choose between Chapter 13 and Chapter 7 bankruptcy proceedings.

The type of bankruptcy that someone files will determine many different details about the bankruptcy process they’ll navigate. People, therefore, need to know what differentiates a Chapter 7 bankruptcy from a Chapter 13 filing before committing to an approach.

Eligibility criteria for Chapter 7

A Chapter 7 bankruptcy can be a very powerful tool for those with limited income and concerns about their unsecured debts. People can discharge the outstanding balances on their qualifying unsecured financial accounts relatively quickly in a Chapter 7 bankruptcy.

However, the trade-off for the speediness of the process is that there are strict eligibility requirements. The filer will need to pass the means test. They will need to adjust their income for certain allowable expenses and then compare it with the state median income for their household size along with other related calculations. Not everyone in need of financial relief qualifies for a Chapter 7 filing. Chapter 13 bankruptcy is available to virtually anyone, regardless of income levels.

The need to make payments

It takes much longer for an individual to obtain a discharge when they file a Chapter 13 bankruptcy because they have to make years of payments before they can eliminate the remainder of their qualifying financial obligations. People must budget carefully if they hope to complete the repayment plan and secure the discharge of their remaining unsecured balances at the end of the process.

The length of credit reporting

After completing a bankruptcy, there will be a record of someone’s filing on their credit report for years. A Chapter 7 bankruptcy will stay on someone’s credit report for a full decade. However, in consideration of the years of payments that someone makes in a Chapter 13 filing, the record of their bankruptcy discharge will come off of their credit report seven years after the courts close their case. With that said, it is certainly possible to improve someone’s credit score long before the filing is removed from an individual’s report.

Each of these differences can influence whether someone determines that Chapter 7 or Chapter 13 bankruptcy might be the better option for them. Learning more about the different types of bankruptcy can help people choose the right option when they need financial relief due to high levels of personal debt.