Chapter 7 vs. Chapter 13
Are you overwhelmed with financial difficulties? One way to regain control over your finances is by filing for bankruptcy.
Two of the most common options are Chapter 7 and Chapter 13 bankruptcy. Both offer a fresh start, but each works in a different way. Choosing between the two can be complicated, and the right choice depends on your unique financial situation.
At Watson Law Firm in Harrison, Arkansas, we aim to provide you with the information you need to make the right decision for your financial recovery. Here, we’ll explore the main differences between Chapter 7 and Chapter 13 bankruptcy, including eligibility requirements, the process itself, and the long-term effects on your financial future.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often referred to as "liquidation" bankruptcy, is designed to discharge most unsecured debts, such as credit card bills, medical bills, and personal loans. If you're struggling to manage overwhelming debt and don't have substantial assets, Chapter 7 may be the right choice for you.
However, it’s important to understand the eligibility requirements and the impact this process will have on your property.
Eligibility: To qualify for Chapter 7, you must pass the means test, which evaluates your income compared to the median income in your state. If your income is too high, you may not qualify for Chapter 7 bankruptcy and may need to consider Chapter 13 instead.
Liquidation of assets: Some of your assets may be sold to pay off creditors. However, there are exemptions that allow you to keep certain property, like your home or car, depending on state laws.
Debt discharge: Once the process is complete, most unsecured debts will be discharged, meaning you no longer owe them. This can give you a fresh start without the weight of overwhelming debt.
Credit impact: Chapter 7 bankruptcy stays on your credit report for up to 10 years, which can make it more difficult to obtain credit in the future.
Although Chapter 7 can provide relief by eliminating unsecured debt, it’s not right for everyone. If you have significant assets or high income, you may want to consider Chapter 13 bankruptcy as an alternative.
What Is Chapter 13 Bankruptcy?
Unlike Chapter 7, Chapter 13 bankruptcy is often referred to as "reorganization" bankruptcy. In Chapter 13, you’ll work with your creditors to create a repayment plan that lasts between three and five years. The goal is to repay as much debt as possible while keeping your property.
Chapter 13 is a good option for people who have a steady income and are looking for a way to get out of debt without losing valuable assets.
Eligibility: To qualify for Chapter 13, you must have a regular income and your secured and unsecured debts must be below certain limits. For 2023, the limit for unsecured debts is $465,275, and for secured debts, it’s $1,395,875.
Repayment plan: In Chapter 13, you propose a repayment plan to pay back creditors over three to five years. The amount you pay depends on your income, expenses, and the value of your property.
Keep your assets: One of the biggest benefits of Chapter 13 is that you can keep your property, including your home and car, as long as you make the required payments under your repayment plan.
Debt discharge: After you complete your repayment plan, any remaining unsecured debt may be discharged. However, not all types of debt are eligible for discharge, such as student loans or child support.
Credit impact: Chapter 13 stays on your credit report for seven years, which is less damaging than Chapter 7. It can also help improve your credit over time as you make regular payments.
Chapter 13 bankruptcy is often ideal for individuals who have a steady income but are struggling with debt they can’t fully pay off in a short amount of time. If you have assets you want to protect and can afford to make regular payments, Chapter 13 might be the right choice for you.
The Differences Between Chapter 7 and Chapter 13 Bankruptcy
While both Chapter 7 and Chapter 13 offer debt relief, there are several key differences that can help you determine which option is best for your financial situation. Understanding these differences can give you a clearer picture of what to expect from each bankruptcy process.
Eligibility: Chapter 7 has stricter income requirements due to the means test, whereas Chapter 13 requires a regular income but has higher debt limits.
Asset protection: Chapter 7 involves liquidation of assets, but Chapter 13 allows you to keep most of your property by entering into a repayment plan.
Debt discharge: In Chapter 7, most unsecured debts are discharged after the liquidation process, while in Chapter 13, you may still need to pay some of your debts through a structured repayment plan.
Duration: Chapter 7 is much quicker, typically taking three to six months to complete, while Chapter 13 takes three to five years to finish, depending on the repayment plan.
Credit impact: Chapter 7 stays on your credit report for 10 years, while Chapter 13 stays for seven years, although both options will impact your credit score.
Ultimately, choosing between Chapter 7 and Chapter 13 bankruptcy depends on your unique financial circumstances, including income, assets, and long-term goals for debt relief.
When to Choose Chapter 7 Bankruptcy
Chapter 7 bankruptcy may be the right choice for you if you meet the following criteria:
You have little to no income: If you don’t earn enough to support a repayment plan, Chapter 7 could be a better option, as it doesn’t require a repayment plan.
You have significant unsecured debt: If most of your debt is unsecured (like credit cards or medical bills), Chapter 7 may be ideal, as it can eliminate these debts in a matter of months.
You don’t own valuable property: If you don’t have significant assets to protect, Chapter 7 may offer the quickest way to clear your debts and start fresh.
However, keep in mind that Chapter 7 may not be suitable if you have significant assets, as some of them may be sold to pay creditors. Additionally, if you have non-dischargeable debts such as student loans or alimony, Chapter 7 may not fully resolve your financial situation.
When to Choose Chapter 13 Bankruptcy
Chapter 13 may be the better option if you:
Have a steady income: If you have regular income and can make payments on a structured plan, Chapter 13 allows you to repay your debts over three to five years.
Want to protect your assets: If you have valuable assets like a home or car, Chapter 13 allows you to keep them while making payments to creditors.
Can’t qualify for Chapter 7: If you earn too much to qualify for Chapter 7 bankruptcy but still need debt relief, Chapter 13 provides an alternative by restructuring your debt.
Chapter 13 is also ideal if you have priority debts, like back taxes or child support, that need to be repaid. While it takes longer and requires more planning, it offers a way to manage debt and protect your assets.
The Bankruptcy Process
Both Chapter 7 and Chapter 13 bankruptcy require individuals to file a petition with the bankruptcy court. While both offer a path to a fresh financial start, the processes differ in terms of structure and timelines.
In a Chapter 7 bankruptcy, the process begins with the filing of the bankruptcy petition. Following this, individuals must attend a creditors' meeting, also known as a 341 meeting, where they will meet with the bankruptcy trustee and creditors.
The trustee will then liquidate any non-exempt assets to pay creditors, and most unsecured debts will be discharged. Typically, Chapter 7 cases take between 3 to 6 months to complete.
On the other hand, a Chapter 13 bankruptcy also begins with the filing of the petition, but it includes the submission of a repayment plan. After filing, debtors must attend a creditors' meeting, and the court will review and approve the repayment plan.
Over the next 3 to 5 years, the individual will make monthly payments to a trustee who will distribute them to creditors. Once the repayment plan is completed, any remaining unsecured debts may be discharged.
While both Chapter 7 and Chapter 13 provide a fresh start, they have distinct advantages. Chapter 7 is typically quicker and can eliminate most unsecured debts, while Chapter 13 is more flexible, allowing individuals to retain their assets while repaying a portion of their debts.
Contact an Experienced Bankruptcy Lawyer Today
Deciding between Chapter 7 and Chapter 13 bankruptcy is an important decision, and one that depends on your individual financial situation. Contact my firm, Watson Law Firm, today for guidance in Harrison, Arkansas, or the surrounding areas of Boone County, Newton County, Marion County, and Baxter County.
