If you’re facing financial difficulties and considering bankruptcy as an option, you’re not alone. Bankruptcy gives individuals and businesses a fresh financial start when overwhelmed by debt.
Two of the most explored types of bankruptcy are Chapter 7 and Chapter 13. There are numerous differences between these two options that you can consider to help you make the right decision based on your unique situation.
Choosing between Chapter 7 and Chapter 13
The choice between Chapter 7 and Chapter 13 bankruptcy should be based on your unique financial circumstances. If your income is lower than average, Chapter 7 might be a better option as it offers a faster path to debt relief. The Chapter 7 process offers a relatively quick and straightforward path to debt relief, typically lasting three to six months.
Chapter 7 bankruptcy is designed for individuals and businesses that can no longer meet their financial obligations. Chapter 7 filers can have their qualifying unsecured debts discharged within a matter of months. A small fraction of Chapter 7 cases involve the sale of valuable non-exempt assets by a trustee. This risk is rare but it is a consideration.
However, if you have valuable assets worth protecting, Chapter 13 will allow you to keep them without question while repaying your debts. Chapter 13 bankruptcy, often called the wage earner’s plan, is a reorganization bankruptcy designed for individuals with a regular income. Chapter 13 allows you to create a manageable repayment plan to pay down your debts over three to five years before the remaining balance of eligible debt is discharged.
Eligibility criteria
The qualifying requirement for Chapter 13 bankruptcy is a reliable and consistent source of income because, as mentioned, Chapter 13 is for the wage earner’s plan. You must demonstrate your ability to fund manageable installment payments throughout the life of your plan.
One of the primary eligibility factors for Chapter 7 bankruptcy is the means test that compares your monthly earnings to the median income in your state. If your income falls below the median, you’re generally eligible for Chapter 7. However, if it exceeds the median, you may need to pass a more detailed means test to qualify. Before filing for Chapter 7, you must also complete a credit counseling course to help ensure that you understand what you’re committing to and the alternatives that are available.
Choosing a debt relief plan is a life-altering decision that can significantly impact your financial future. Therefore, seeking legal guidance to assess your situation and guide you toward the best course of action is essential before taking such a leap.