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Chapter 7 v Chapter 13 Bankruptcy
Declaring bankruptcy is a major decision that can have long-term negative effects on your finances and credit. It’s also a complicated legal process that may require you to do a fair amount of research before deciding your path forward, and if it’s even the best option for you.
If you do ultimately decide to file, one of the first big decisions you’ll make is whether to file Chapter 7 or Chapter 13 bankruptcy. These chapter names refer to sections of the U.S. Bankruptcy Code where it’s outlined how, exactly, your debt is taken care of in each process. The choice (or necessity) to file one or the other determines whether you’ll be put on a debt repayment plan or if your debts will be settled with the property you own. If you find yourself at a crossroads, start here to get a grasp on what’s ahead. Your income and assets will determine which chapter you file so we always see it as false to say that you can just choose which bankruptcy chapter you can file even, though it is possible in limited situations. More information is provided below.
The biggest differences between Chapter 7 and Chapter 13 bankruptcy are what happens to your property and who qualifies financially.
Chapter 7 requires you to sell property that isn’t exempt to pay off your debts. However, a survey done by the American Bankruptcy Institute in 2018 showed that if you file exemption paperwork properly, 93% of filers in the United States can protect all their assets.
Chapter 7 bankruptcy typically discharges your obligations and allows you to get on with your life much faster than Chapter 13, which gives you a chance to maintain your property. The tradeoff for Chapter 13: A court-ordered repayment plan, which can take three to five years is completed.
Not Everyone qualifies for a chapter 7 bankruptcy. You must pass a means test, which uses a formula that prevents higher-income debtors from using bankruptcy provisions to completely wipe out their debts. In Chapter 7, you must either have a below-median level income for your state or pass a means test that examines income, expenses, and family size to determine whether you could reasonably repay your debts with whatever income you have after paying for essentials. Those who fail this means test may use Chapter 13.