The two most common kinds of personal bankruptcy are Chapter 7 and Chapter 13. Each of these bankruptcy options offers a fresh start to those struggling with debt – but there are significant differences between the two. In this article, we will examine the specifics of each type of bankruptcy so that you can make the right choice for your situation.
No matter your choice, we always recommend that you consult with a bankruptcy attorney before proceeding to ensure that you understand the complexities of the legal process.
Bankruptcy Options: Chapter 7
Chapter 7 bankruptcy represents over 70% of all bankruptcies filed in recent years. It is the most rapid option for eliminating debt, with most filers granted a discharge within 4 months. To qualify for a Chapter 7 bankruptcy, an individual is required to pass a means test. This test compares personal income to the state median income to guarantee the petitioner falls within the income limit.
Under Chapter 7, the assigned bankruptcy trustee can sell any personal property that is not protected by bankruptcy exemptions. The proceeds of these sales will be used to repay creditors. While that may sound distressing, most filers are able to keep most (if not all) of their personal property.
Chapter 7 is typically a good choice for those who:
- only have unsecured debt, such as credit card debt or medical bills
- don’t have a regular income or adequate income to cover basic living expenses
- don’t have any non-dischargeable debts, such as alimony or child support (or are current with payments)
There are some potential drawbacks when filing Chapter 7. These may include:
- Property not protected by exemption may be sold. Exemptions protect clothing, furniture, retirement accounts, and cars up to a certain value. Personal property classified as “nonexempt property” can be seized and sold. This happens very rarely, but anyone who has property not covered by an exemption should consult with an attorney.
- Chapter 7 provides no assistance with non-dischargeable debt or past-due mortgage payments.
- The bankruptcy record remains on your personal credit report for up to 10 years.
Bankruptcy Options: Chapter 13
Approximately 25% of personal bankruptcies are Chapter 13. The Bankruptcy Court has designated that the maximum amount of debt to qualify for this chapter is $2,750,000. Although that number may seem high, it includes secured debts (such as mortgages) and unsecured debts (such as credit cards and medical bills).
Chapter 13 bankruptcy is known as “reorganization bankruptcy” because a three-to-five-year repayment plan is submitted to the court for approval. Debts are “reorganized” into more manageable monthly payments, and discharge of all eligible debt is granted only if all payments are made as promised. Creditors are allowed to submit any objections to the proposed Chapter 13 plan, but once it is approved, creditors must abide by the terms of the plan. Chapter 13 is usually removed from personal credit history after seven years.
Chapter 13 is typically appropriate for those who:
- Want to keep non-exempt property
- Are behind on mortgage payments and want to prevent foreclosure
- Have a car loan with negative equity or a high-interest rate
- Have non-dischargeable debt
- Owe money from a property settlement stemming from marriage dissolution
The downsides of Chapter 13 bankruptcy may include:
- It requires a 3-5 year commitment, and discharge is only granted upon completion of the plan.
- Income is monitored by the designated trustee, who will receive copies of tax returns and may use refunds to pay creditors.
- There is less certainty of success, as a lot can happen in life over a 5-year period.
In Summary
Chapter 7 and Chapter 13 bankruptcies each offer benefits to those who need financial relief, but the determination of which solution is “better” depends on your situation.
If you are unsure of which Chapter is right for you, call the law offices of Richard V. Ellis. We have helped hundreds of Sarasota residents to get the fresh start they need in the way that benefits them most.
