The Difference Between Chapter 7 & Chapter 13 Bankruptcy

When it comes to bankruptcy, many people find themselves wondering about the difference between Chapter 7 and Chapter 13. Both are legal processes designed to help individuals manage overwhelming debt, but they operate in very different ways. Understanding these differences can help you determine which option may be more beneficial for your situation.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” is designed for individuals who need a fresh start. In this process, a bankruptcy trustee is appointed to oversee the liquidation of non-exempt assets. The trustee sells these assets to pay off creditors. It’s important to note that not all property is sold; many people retain their assets by utilizing exemptions that protect certain properties from being liquidated.

One of the key benefits of Chapter 7 is the speed of the process. Typically, it takes about three to six months from filing to discharge. This allows individuals to quickly eliminate unsecured debts, such as credit card bills and medical expenses.

What Is Chapter 13 Bankruptcy?

In contrast, Chapter 13 bankruptcy is often called a “repayment plan” bankruptcy. This option is suitable for individuals who have regular income and want to keep their property while catching up on missed payments. Under Chapter 13, debtors propose a repayment plan that lasts three to five years, during which they make monthly payments to a bankruptcy trustee. The trustee then distributes these payments to creditors.

Chapter 13 provides several advantages, especially for those behind on secured debts like mortgages or car loans. It allows individuals to catch up on these payments over time while keeping their assets. Additionally, Chapter 13 can offer lower interest rates and a portion of unsecured debts may be discharged at the start of the repayment plan.

Key Differences Between Chapter 7 & Chapter 13

Understanding the differences between Chapter 7 and Chapter 13 is crucial for individuals considering bankruptcy. Here’s a breakdown of their key distinctions:

• Asset Liquidation: Chapter 7 involves the liquidation of non-exempt assets, while Chapter 13 allows individuals to keep their property as long as they adhere to the repayment plan.
• Duration: Chapter 7 is typically resolved within a few months, whereas Chapter 13 repayment plans last three to five years.
• Eligibility: Chapter 7 has income limitations and requires passing a means test. Chapter 13 has debt limits but allows individuals with a steady income to qualify.
• Debt Discharge: Chapter 7 discharges most unsecured debts quickly, while Chapter 13 requires repayment of certain debts over time.

When To Choose Chapter 7 Bankruptcy

Chapter 7 may be the right choice for you if:

• You have little or no disposable income after essential expenses.
• You are not behind on payments for secured debts like your home or car.
• You can exempt most of your assets, allowing you to retain them.

When To Choose Chapter 13 Bankruptcy

Consider Chapter 13 if:

• You are behind on your mortgage or car payments and want to keep your property.
• You have a regular income that allows for monthly payments.
• You do not qualify for Chapter 7 due to income restrictions.

Examples To Illustrate The Differences

Let’s break this down further with examples:

Example Of Chapter 7

Imagine Sarah, who has accumulated significant credit card debt and medical bills but has a steady job and a modest income. She has a car worth $5,000 and a small savings account. Sarah qualifies for Chapter 7 because her income falls below the state median. She can protect her car using exemptions and quickly eliminate her unsecured debts, allowing her to start fresh within months.

Example Of Chapter 13

On the other hand, consider John, who is behind on his mortgage payments and has fallen behind on his car loan. John has a stable job, but his debts exceed the limits for Chapter 7. By filing for Chapter 13, John can create a repayment plan that allows him to catch up on his mortgage and car payments over three to five years, while keeping his home and vehicle.

Qualifying For Chapter 7 Vs. Chapter 13

Qualifying for each type of bankruptcy involves different requirements. For Chapter 7, individuals must pass a means test that compares their income to the median income for their state. If their income is too high, they may be required to file under Chapter 13 instead.

In contrast, Chapter 13 requires that individuals have a regular income and that their total debts do not exceed certain limits. As of 2024, the combined secured and unsecured debt limit for Chapter 13 is $2,750,000.

The Impact On Your Credit

Both Chapter 7 and Chapter 13 will affect your credit score. Chapter 7 bankruptcy remains on your credit report for up to ten years, while Chapter 13 stays for up to seven years. The impact on your credit score can vary, but generally, both types of bankruptcy will lower your score significantly.

Summary

Deciding between Chapter 7 and Chapter 13 bankruptcy can be challenging, but understanding the differences can make the process easier. If you’re looking to liquidate debts quickly and qualify for Chapter 7, that may be your best option. However, if you want to keep your property and can manage a repayment plan, Chapter 13 may be the way to go.

Whichever route you choose, it’s essential to consult with a knowledgeable bankruptcy attorney who can guide you through the process and help you determine the best option for your financial situation. If you’re in Central Texas and need assistance navigating your bankruptcy options, reach out to Austin Bankruptcy Lawyers for legal guidance.