Bankruptcy 101: What Are the Differences Between Chapter 7 and Chapter 13?
Bankruptcy is one of those words which scares people, and which they are often taught to avoid at all costs. Declaring bankruptcy is often misunderstood as a failure, and not seen for the very practical solution that it actually represents.
When you dispassionately look at it as just being a solution to handling the fact that you have outstanding debts that you cannot pay, you will see that it has its purpose.
1. What Is Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy, and it is used when you need to wipe out most of your unsecured debts. This can include credit cards, medical bills, and not having to pay off balances through a payment plan. There are income requirements to be able to file Chapter 7.
Right after you file, an automatic stay is activated, and this means any creditors that you have must stop pursuing collection efforts. A bankruptcy trustee is also appointed to sell off any property not protected by the bankruptcy to pay off your creditors.
2. What Is Chapter 13 Bankruptcy?
Chapter 13 is also known as a reorganisation bankruptcy. This is for people who can afford to pay some portion of their debts through a repayment plan.
You can keep all your property, including nonexempt assets, but you will have to pay creditors the value of the non-exempt assets. This is a great solution for those who aren’t eligible to file Chapter 7 but who still need some debt relief.
3. Who Can File?
Chapter 7 is available for both individuals and business entities to file. It is recommended for low-income debtors who have little or no income. It is also useful for those whose debt is more than the value of the property sold.
Chapter 13 is for individuals only and does include sole proprietors, who have don’t have more than $420000 of unsecured debt, or $126000 of secured debt.
4. Are There Any Restrictions?
There are differences in who can file which type of bankruptcy. Chapter 7 eligibility is determined by income. You have to be earning less than the state median income on a monthly basis, and you have to submit to a means test that examines your financial records.
Chapter 13 filing requires you to prove that you have sufficient disposable income. You must be able to meet your repayment obligations after you have subtracted out allowed for expenses and payments on secured debts (secured debts including car loans or mortgages).
5. What Are The Benefits?
Choosing which type of bankruptcy you file is going to be dependent on your income, but it is good to know that both types of the filing have their benefits.
Chapter 7 allows debtors to quickly discharge any qualifying debts that they have, allowing them to get a fresh start in life.
Chapter 13 allows debtors to keep their property, and to get caught up on any missed payments on your mortgage, car, and any nondischargeable priority debt payments.
Finances are definitely something that a lot of people get into trouble with, and most people will have to go into debt at some point in their lives. Understanding how you can handle any situation that you find yourself encountering in a sane and well thought out manner is very reassuring, and it gives you hope. Bankruptcy needn’t be so scary. The rules for when and what you can file are pretty clearly set out, and the pathway you will follow is pretty straight forward for Chapter 7 or Chapter 13.