Bankruptcy: What You Need to Know Before Filing for Chapter 7 or 13
By Article Posted by Staff Contributor
The estimated reading time for this post is 329 seconds
Bankruptcy is a legal process that individuals or businesses can undertake when they are unable to pay their debts. The United States Bankruptcy Code provides two main options for individuals when filing for bankruptcy: Chapter 7 and Chapter 13.
The differences between the two can be significant, and it is essential to understand the basics of both chapters before deciding which one is right for you.
Who can file for Chapter 7 or Chapter 13 bankruptcy?
To file for bankruptcy, you must first meet certain eligibility requirements. Chapter 7 and Chapter 13 bankruptcy have different criteria that must be met before filing.
Chapter 7 bankruptcy is also known as “liquidation bankruptcy” because the court will sell your non-exempt assets to repay your creditors. To qualify for Chapter 7, you must pass the “means test,” which compares your income to the median income in your state.
If your income is lower than the median income, you will likely qualify for Chapter 7. If your income is higher than the median income, you may still qualify for Chapter 7, but additional requirements will need to be met.
Chapter 13 bankruptcy is also known as a “reorganization bankruptcy” because it allows you to restructure your debts and make a plan to repay them over time.
To qualify for Chapter 13, you must have a regular income, and your debts must fall within certain limits. As of 2021, your secured debts must be less than $1,257,850, and your unsecured debts must be less than $419,275.
Is it better to file for Chapter 7 or 13 bankruptcy?
Deciding which type of bankruptcy to file for is not an easy decision. It depends on several factors: income, assets, and debts. Here are some things to consider before deciding which type of bankruptcy to file:
Chapter 7 bankruptcy
Chapter 7 bankruptcy can be a good option if you have limited income, few assets, and unsecured debts like credit card debts, medical bills, or personal loans. In a Chapter 7 bankruptcy, the court will discharge most of your unsecured debts, which means you will no longer be obligated to pay them.
One of the benefits of Chapter 7 bankruptcy is that it is usually a relatively quick process. It typically takes around three to six months to complete. However, keep in mind that not all debts can be discharged in Chapter 7 bankruptcy.
For example, student loans, tax debts, and child support payments cannot be discharged in Chapter 7 bankruptcy.
Another downside of Chapter 7 bankruptcy is that the court will sell your non-exempt assets to repay your creditors. If you have a lot of valuable assets, Chapter 7 bankruptcy may not be the best option for you.
Chapter 13 bankruptcy
Chapter 13 bankruptcy can be a good option if you have a regular income and secured debts like a mortgage or a car loan that you want to keep paying.
In a Chapter 13 bankruptcy, you will make a plan to repay your debts over three to five years. The court will approve your plan, and you will make payments to a trustee, who will distribute the payments to your creditors.
One of the benefits of Chapter 13 bankruptcy is that you can keep your assets, even if they are not exempt. This is because you will be repaying your debts over time rather than having your assets sold to repay your creditors.
Another benefit of Chapter 13 bankruptcy is that it can stop foreclosure proceedings and allow you to catch up on missed mortgage payments. However, remember that you must continue making regular mortgage payments during your Chapter 13 bankruptcy.
Which bankruptcy chapter is best for you?
Determining which bankruptcy chapter is best for you depends on your circumstances. Here are some factors to consider when making your decision:
Income and assets
As mentioned earlier, the means test will determine if you are eligible for Chapter 7 bankruptcy. If your income is above the median income in your state, Chapter 13 may be a better option for you.
Additionally, if you have a lot of valuable assets, Chapter 13 may be a better option, as you can keep them.
Debts
The type of debts you have can also play a role in which bankruptcy chapter is best for you.
Chapter 7 may be the better option if you have mostly unsecured debts since those debts can be discharged. However, if you have secured debts you want to keep paying, like a mortgage or car loan, Chapter 13 may be the better option since you can keep those assets.
Foreclosure or repossession
If you are facing foreclosure or repossession of a vehicle, Chapter 13 bankruptcy may be the better option since it can stop those proceedings and allow you to catch up on missed payments.
Timeframe
Chapter 7 bankruptcy is usually a quicker process than Chapter 13. If you want to get your debts discharged as quickly as possible, Chapter 7 may be the better option. However, keep in mind that not all debts can be discharged in Chapter 7.
Chapter 13 bankruptcy basics
Chapter 13 bankruptcy is a reorganization bankruptcy that allows you to keep your assets while restructuring your debts. Here are some basic facts about Chapter 13 bankruptcy:
- You must have a regular income to qualify for Chapter 13 bankruptcy.
- You will plan to repay your debts over three to five years.
- The court will approve your plan, and you will make payments to a trustee, who will distribute the payments to your creditors.
- You can keep your assets, even if they are not exempt.
- Chapter 13 bankruptcy can stop foreclosure proceedings and allow you to catch up on missed mortgage payments.
- Chapter 13 bankruptcy can also stop wage garnishments, prevent or stop collection actions, and give you more time to pay tax debts.
Chapter 7 bankruptcy basics
Chapter 7 bankruptcy is a liquidation bankruptcy that allows the court to sell your non-exempt assets to repay your creditors. Here are some basic facts about Chapter 7 bankruptcy:
- To qualify for Chapter 7 bankruptcy, you must pass the means test, which compares your income to the median income in your state.
- Most unsecured debts can be discharged in Chapter 7 bankruptcy.
- The court will sell your non-exempt assets to repay your creditors.
- Not all debts can be discharged in Chapter 7 bankruptcy, such as student loans, tax debts, and child support payments.
Conclusion,
In conclusion, bankruptcy is a serious decision that should not be taken lightly. Before deciding to file for bankruptcy, it is important to consider all your options, including debt consolidation or debt settlement.
If you decide to file for bankruptcy, you must choose between Chapter 7 and Chapter 13.
Consider your income, assets, debts, and other circumstances before deciding which type of bankruptcy is right for you. A bankruptcy attorney can help you understand your options and make the best decision for your situation.
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