Chapter 7 and Chapter 13 are the most common types of bankruptcy in the U.S. These options are available to individuals and couples across many jurisdictions. There are key differences in how lawyers and creditors negotiate restitution when money is owed. In a Chapter 13 bankruptcy, the proceeds from the repayment plan are distributed among the creditors, and the bankruptcy trustee oversees the process, making monthly payments to repay the debts.
What is Bankruptcy?
Bankruptcy is a legal process governed by the federal law known as the ‘Bankruptcy Code.’ This code offers relief to individuals or entities facing financial distress. Bankruptcy cases are handled through the United States Bankruptcy Court, which oversees the proceedings and ensures compliance with the law.
The most common types of bankruptcy are Chapter 7 and Chapter 13
Chapter 7 is a “liquidation” case, where non-exempt assets are sold to repay creditors. Chapter 13 is a “debt adjustment” or “wage earner” case, where individuals create a repayment plan to pay off their debts over a set period of time
Chapter 7 is available to both individuals and business entities, while Chapter 13 is only available to individuals with regular income.
To be eligible to file for Chapter 7 bankruptcy
Eligibility Rules for Chapter 7 Bankruptcy Filing
To be eligible for Chapter 7 bankruptcy, you must meet the following requirements:
Means Test: Your monthly income must be below the median income for a household of your size in your state, or you must pass a means test to demonstrate that you cannot afford to repay your debts under a Chapter 13 repayment plan.
Previous Bankruptcy Cases: You cannot file for Chapter 7 if you have received a discharge under Chapter 7 within the last 8 years or Chapter 13 within the last 6 years.
No Recent Dismissals: Your case may not be eligible if a prior bankruptcy filing was dismissed within the past 180 days due to willful non-compliance with court orders or a voluntary dismissal after creditors sought relief from the court to recover property.
Credit Counseling: You must complete a credit counseling course from an approved provider within 180 days before filing. After filing, you are also required to complete an instructional course on personal financial management to receive a discharge. A list of accredited credit counselors can be found on the United States Trustee’s website.
To qualify for Chapter 13 bankruptcy, you must have a regular income, unsecured debts under $419,275, and no more than $1,257,850 of secured debt (as of 2021). You must have a steady income to fund a Chapter 13 repayment plan.
Process for Filing Chapter 7 Bankruptcy
Complete Credit Counseling: Before filing, you must complete a credit counseling session with an approved provider within 180 days of filing. This step is mandatory to explore alternatives to bankruptcy.
Gather Financial Documents: Collect necessary documents, including income records, tax returns, a list of assets and liabilities, debts, monthly expenses, and any other financial information required to complete the bankruptcy petition.
File the Bankruptcy Petition: Submit the bankruptcy petition, along with supporting schedules and forms, to the U.S. Bankruptcy Court. This officially starts your case and triggers an automatic stay, halting most collection activities from creditors.
Appoint a Trustee: After filing, the court assigns a bankruptcy trustee to oversee your case. The trustee reviews your documents and identifies non-exempt assets that may be sold to repay creditors.
Attend the 341 Meeting of Creditors: You must attend this meeting, where the trustee and creditors can ask questions about your finances, assets, and bankruptcy petition.
Complete a Financial Management Course: To receive a discharge, you must complete an approved personal financial management course after filing.
Discharge of Debts: If all requirements are met, the court will issue a discharge order, relieving you of eligible debts. This typically occurs 3-6 months after filing.
Case Closure: After all assets are administered and debts are discharged, the court officially closes your bankruptcy case.
Discharge of unsecured debts in Chapter 7
Chapter 7 bankruptcy discharges qualifying debts, including credit card balances, medical bills, and personal loans. Unsecured creditors may receive payment from the proceeds of non-exempt asset sales, if such assets are available for liquidation.
Chapter 7 bankruptcy discharges qualifying debts, including credit card balances, medical bills, and personal loans. Unsecured creditors may receive payment from the proceeds of non-exempt asset sales, if such assets are available for liquidation.
Income Limits and Potential Loss of Property in Chapter 7
The bankruptcy trustee can sell any property not protected by an exemption. You may be able to keep your home or car, but you will still be responsible for the mortgage and/or car loan.
In a Chapter 13 case, you create a plan to repay all or a portion of your debts over time. You make regular payments to the trustee, who distributes the money to your creditors. Your repayment plan must pay unsecured creditors at least as much as they would receive if your nonexempt assets were liquidated under Chapter 7. You can keep your property, but you must pay your unsecured creditors an amount that equals the value of your assets not covered by a bankruptcy exemption.
Chapter 7 bankruptcy also stays on your record longer—up to 10 years—compared to Chapter 13, which typically remains on your record for 7 years.
Chapter 7 is often referred to as “liquidation bankruptcy.” It involves the sale of non-exempt assets to repay creditors. One of the main benefits is that you may not have to repay creditors via a repayment plan, which differs from Chapter 13. A bankruptcy lawyer can help you navigate the process and determine which assets you may be able to keep while eliminating eligible debts.
Chapter 7 vs. Chapter 13: Which is Right for You?
- Chapter 7: Ideal for individuals with limited income who want to eliminate unsecured debts quickly. It is faster than Chapter 13 but can result in the loss of non-exempt property.
- Chapter 13: Better for individuals with a regular income who need to reorganize their debts and avoid foreclosure. Chapter 13 involves a repayment plan and allows you to keep property that might otherwise be liquidated under Chapter 7.
Filing for bankruptcy affects your credit score and will remain on your credit report for up to 10 years (Chapter 7) or 7 years (Chapter 13). However, Chapter 13 may cause less damage to your credit score than Chapter 7 because it involves repayment, rather than liquidation.
Understanding the differences between Chapter 7 and Chapter 13 bankruptcy is crucial to making the best decision for your financial future. Seeking professional legal advice can ensure your rights are protected and help you achieve a fresh financial start.Contact Us for a Free Consultation
Q & A
Should you file for Chapter 7 or Chapter 13 bankruptcy?
- Ultimately, the taxes you owe after closing a business might be manageable. However, if they are overwhelming, filing for Chapter 13 bankruptcy could be a necessary solution.
What are the disadvantages of filing for Chapter 7 bankruptcy?
- Filing for Chapter 7 bankruptcy can significantly impact your credit score and remain on your credit report for up to 10 years.
Is Chapter 13 less damaging to your credit compared to Chapter 7?
- Chapter 13 bankruptcy generally causes less damage to your credit compared to Chapter 7 because it involves a structured repayment plan rather than the liquidation of assets. Future lenders may view Chapter 13 more favorably, especially if you have a very poor credit score.