When individuals or families find themselves overwhelmed with debt and unable to meet their financial obligations, bankruptcy can provide a legal avenue for debt relief – and a fresh start. The two most common forms of personal bankruptcy in the United States are Chapter 7 and Chapter 13 bankruptcy. While both options are designed to help individuals manage or eliminate their debts, they differ significantly in terms of process, qualifications, and outcomes.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy, sometimes referred to as “liquidation” bankruptcy, is typically the fastest and simplest form of bankruptcy available to individuals. Under Chapter 7, most of your unsecured debts (such as credit card bills, medical bills, and personal loans) are discharged or erased, giving you a fresh financial start. However, in exchange for this debt relief, the bankruptcy trustee may liquidate some of your other assets to repay your creditors.
Key elements of Chapter 7 bankruptcy
- Asset liquidation: In a Chapter 7 case, the bankruptcy trustee reviews your assets and may sell non-exempt property to pay off creditors. Most people who file for Chapter 7 are able to keep the majority of their essential belongings, such as a home, car, or personal property, because of exemptions provided under federal and state laws.
- Discharge of unsecured debts: Chapter 7 primarily addresses unsecured debts. These include credit cards, medical bills, and utility bills. Secured debts, such as a mortgage or car loan, are protected by exemptions, but if you own non-exempt property or assets, those will be liquidated to pay creditors.
- Quick process: Chapter 7 bankruptcy is generally a quicker process compared to Chapter 13. In most cases, the discharge of debts occurs within three to six months of filing.
- No repayment plan: Unlike Chapter 13, there is no requirement to create a repayment plan under Chapter 7. Once the case is completed, most of your debts are eliminated, giving you a clean slate.
- Repayment plan: In a Chapter 13 case, the court will approve a repayment plan that allows you to make monthly payments to your creditors based on your disposable income. The repayment period typically lasts three to five years.
- Keep your property: Unlike Chapter 7, Chapter 13 does not require you to liquidate your assets. You can keep your home, car, and all other property as long as you continue making payments according to the court-approved plan.
- Catching up on secured debts: Chapter 13 is particularly beneficial if you are behind on mortgage payments or car loans, as it allows you to catch up on these secured debts over time. As long as you adhere to the repayment plan, you can avoid foreclosure or repossession.
- Debt discharge: At the end of the repayment period, any remaining unsecured debt that is not covered by your repayment plan may be discharged.
Qualifying for Chapter 7 bankruptcy
Not everyone qualifies for Chapter 7 bankruptcy. To file, you must pass a “means test.” This test is designed to determine whether your income is low enough to file for Chapter 7. The means test compares your household income to the median income for a household of your size in your state. If your income is below the state median, you will likely qualify for Chapter 7. If your income exceeds the median, you may still qualify if your disposable income, after certain allowed expenses, is insufficient to repay your debts.
If you do not pass the means test, you may have to file for Chapter 13 bankruptcy instead.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy, sometimes called a “wage earner’s plan,” allows individuals with regular income to create a repayment plan to pay off part or all of their debts over a period of three to five years. Rather than liquidating assets, Chapter 13 focuses on restructuring your debts and enabling you to catch up on overdue payments while keeping your property.
Key elements of Chapter 13 bankruptcy:
Qualifying for Chapter 13 bankruptcy
To file for Chapter 13 bankruptcy, you must have a regular source of income that allows you to make the required payments under the repayment plan. Additionally, there are limits to the amount of debt you can have in order to qualify. As of 2024, the unsecured debt limit for Chapter 13 is $465,275, while the secured debt limit is $1,395,875. If your debts exceed these limits, you may not be eligible for Chapter 13 and may need to consider other options.
Furthermore, if you have previously filed for bankruptcy, there are waiting periods before you can file again under Chapter 13.
Choosing between Chapter 7 and Chapter 13
The decision to file for Chapter 7 or Chapter 13 bankruptcy depends on your financial circumstances, assets, and long-term goals. Chapter 7 offers a faster route to debt relief but may require the liquidation of some assets. On the other hand, Chapter 13 allows you to retain your property while making manageable payments over time. It is absolutely essential to talk to a qualified bankruptcy attorney to determine which option is best for your particular situation.
Call Rubin & Associates today!
If you are struggling financially and considering bankruptcy, navigating the complexities of the legal system can be overwhelming. The entire team at Rubin & Associates is here to help you through the process and make it as simple as possible. Call us today at 214-760-7777 for a free consultation – we will walk through your financial picture and help you make the best decision for your future. Let us help you get back on the path to financial freedom!