Chapter 7 or Chapter 13: Which Bankruptcy is Right for You?

Photo courtesy of Steve A. Johnson

Many people who are contemplating filing for Bankruptcy are misinformed on many important issues surrounding how to file, when to file, and which type of bankruptcy is most appropriate. Today, we will clarify the differences between Chapter 7 and Chapter 13 Bankruptcy to help readers understand specifically what is involved and required in each type.

Chapter 7 Chapter 13
Simple description Personal/business assets are liquidated because of a person’s inability to pay debts. Payment plan is created by court for people with reliable incomes to pay all or part of their debts.
How it works No more than 180 days before filing, credit counseling should be obtained. When petition is filed with the court, a trustee will be appointed. All assets that are nonexempt must be surrendered, and the money from these assets will be split between all creditors. No more than 180 days before filing, credit counseling, and, if applicable, a debt management plan should be obtained. File petition and plan together. A repayment plan will be established and should conclude in 3 to 5 years. Payments made are to come from disposable income. Assets are retained.
Financial limitations Anyone filing Ch. 7 must pass the “means test”, ensuring their eligibility based on their income being lower than the state median. Ch 13. filings are reserved for debtors who owe less than $360,475 in unsecured debts and less than $1,081,400 in secured debts.
How often you can file Individuals are ineligible if their debts were discharged under Ch. 7 within the past eight years. Individuals are ineligible if they received discharge under Ch. 7, Ch. 11, or 12 within the past four years, or if they received discharge under Ch. 13 within the past two years.
Resulting effect on debts owed Aside from limitations noted in the Bankruptcy (student loans, child-support, taxes), most existing debts will be wiped out and responsibility to current creditors will end. Aside from limitations noted in the Bankruptcy (student loans, child-support, taxes), a portion of debts will be paid under a repayment plan, and the remaining debt amount will be wiped out.
Can you keep your home? You may be able to keep your home if mortgage payments are kept current and if there isn’t substantial nonexempt equity. Additionally, spousal ownership may help you keep your home. If your repayment plan is thoroughly completed and there is not substantial nonexempt equity, you will keep your home. Spousal ownership may also help you keep your home.
Can you keep your vehicle? Your car or truck may be repossessed by creditors unless you can absolutely prove it is necessary for work. If your repayment plan is thoroughly completed, you will be able to keep your vehicle.
How will this affect your credit? A Ch. 7 Bankruptcy will stay on your credit record for up to 10 years and will be visible by prospective lenders and employers. A Ch. 13 Bankruptcy may remain on your credit report for up to 10 years. Some creditors only report a Ch. 13 for 7 years.

For more information about filing for Chapter 7, Chapter 13, or another type of Bankruptcy, contact Veitengruber Law for a free consultation, and check back soon for more details about life after Bankruptcy.

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