Bankruptcy can offer a way for people struggling with debt to restore their financial standing. In the United States, Chapter 7 and Chapter 13 are two common types of bankruptcy filings. Each serves distinct advantages, but they also have different eligibility requirements and methods. What makes these filings different?
What should you know about Chapter 7 bankruptcies?
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” eliminates most unsecured debts, such as credit card debt and medical bills. Here are some key aspects of Chapter 7:
- Only people under a certain income qualify: To qualify for Chapter 7, individuals must pass the “means test,” which evaluates whether their income is low enough to file under this chapter. If your income is above the median for your state, you may not qualify for a Chapter 7 filing.
- Chapter 7 bankruptcies involve selling assets to pay some debts: In Chapter 7, a trustee oversees the sale of non-exempt assets. They use the proceeds to pay creditors, and the court will discharge some other debts. It provides a fresh start by wiping out most debts, but it can also result in the loss of property that is not exempt under bankruptcy laws.
- This bankruptcy process offers a quick turnaround: The Chapter 7 process typically lasts around 3 to 6 months from filing to discharge.
What should you know about Chapter 13 bankruptcies?
Chapter 13 bankruptcies are “reorganization bankruptcies.” This type allows people to pay off their debts over time. Key features include:
- More people qualify for Chapter 13 filings: Chapter 13 is available to individuals with a regular income, including those who do not qualify for Chapter 7 filings. There are debt limits for secured and unsecured debts to qualify.
- Chapter 13 bankruptcies focus on repaying debts: Chapter 13 allows individuals to keep their property and catch up on missed mortgage or car loan payments through a repayment plan. This provides an opportunity to reorganize their financial affairs without losing assets.
- Chapter 13 bankruptcies often take longer: The repayment plan typically lasts 3 to 5 years. The courts may discharge any remaining eligible debts after this plan ends.
An attorney can help you determine which is right for you
Choosing the right bankruptcy filing can be challenging, and you should carefully consider how each option could support your financial recovery and future stability. Consulting with a bankruptcy attorney can provide personalized advice and help you determine the best path forward.
While choosing the right type of bankruptcy filing can be challenging, either type can help you achieve financial relief and move toward a brighter future.