One of the most basic decisions for those filing for bankruptcy is determining which Chapter is appropriate – Chapter 7 or Chapter 13. While this topic has been discussed on this blog in the past, it is essential to review it periodically. Six types of bankruptcy are identified in the U.S. Bankruptcy Code, but Chapter 7 (liquidation bankruptcy) and Chapter 13 (reorganization bankruptcy) are considered the most common for individuals and small businesses.
Which one is best for you, and how can you determine eligibility? That depends on the details of each situation.
The Differences Defined
Individuals generally file under Chapter 7 or 13, as these two bankruptcies target individual debtors. While it is true that Chapter 11 may be appropriate for sole proprietors and businesses, personal bankruptcies are rarely filed under that Chapter. Here’s what you need to know about Chapter 7 and Chapter 13 filings.
Eligibility Requirements for Chapter 7
The defining characteristic of Chapter 7 is liquidation. Any non-exempt property is given over to a trustee, who sells the assets and allocates the proceeds to creditors. At the end of this process, the filing party no longer owes their creditors.
In Chapter 7, some assets are identified as exempt from liquidation. Legally exempt assets vary by state but generally include home furnishings, personal clothing, and, in some cases, a personal vehicle. Most people who file Chapter 7 only own exempt assets, so very little (if anything) gets liquidated. In these no-asset circumstances, creditors will not be repaid.
With or without payment to creditors, personal debts are still discharged, the debtor no longer owes the creditors, and the creditor must cease all collection activities. While most debts are eligible for discharge, some are non-dischargeable – such as student loans, tax debt, child support, and alimony obligations.
When filing Chapter 7, Florida debtors must pass a Means Test, proving that their income is not higher than the median income in the state. If their income is higher than this figure, the bankruptcy court may require they file under Chapter 13.
Chapter 7 filings also require the completion of a credit counseling course from an approved provider to qualify for debt discharge.
Chapter 7 is the most straightforward type of bankruptcy, and some individuals opt to go pro se (represent themselves without an attorney.) However, experts strongly recommend against this strategy due to bankruptcy’s far-reaching financial and legal consequences.
Eligibility Requirements for Chapter 13
A Chapter 13 bankruptcy is often referred to as a “wage earner’s plan.” This option is typically appropriate for those individuals with a steady income from a job. Chapter 13 permits filers to retain specific valuable assets, such as their home. The trustees and attorneys work to create a plan to pay back debts over a period of time. Chapter 13 also allows for the discharge of some divorce and tax obligations.
A disadvantage of Chapter 13 is that the debtor is required to pay back some or all of their debt. The process requires the filing party to submit a repayment plan for court approval. The plan usually requests lower interest rates and some debt forgiveness. The plans may last three to five years, and debts are only discharged after the last payment. While creditors can object to the plan, they must abide by it once the court approves it.
A debt cap restricts the eligibility for those hoping to file Chapter 13. Only those with debts totaling less than $2,750,000 are allowed to file under Chapter 13. The debt caps are periodically adjusted based on the Consumer Price Index (CPI). The current amounts are effective as of April 1, 2022, and are scheduled for revision on April 1, 2025.
Because preparing a repayment plan can be complicated, Chapter 13 filers should always hire a bankruptcy attorney to ensure the best results.
Ready to Get Started?
Bankruptcy can seem complex and overwhelming, but Richard V. Ellis and his team of Sarasota bankruptcy attorneys are here to help. We have assisted thousands of people in getting back on a solid financial path, and we can help you. Call today to learn more.
