{"id":14518,"date":"2021-04-28T09:40:00","date_gmt":"2021-04-28T15:40:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=14518"},"modified":"2024-11-13T15:01:02","modified_gmt":"2024-11-13T21:01:02","slug":"chapter-7-vs-chapter-13-bankruptcy","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/life-events\/chapter-7-vs-chapter-13-bankruptcy.html","title":{"rendered":"Chapter 7 vs. chapter 13 bankruptcy"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

Bankruptcy is a legal process that lets you restructure your debts or have them discharged. The details of how your bankruptcy plays out depend on your overall financial situation and what type of bankruptcy you file, but the goal of bankruptcy is to help debtors who can\u2019t pay all their debts create a path toward a better financial future while paying as much as they can. To determine how much you pay, consider Chapter 7 vs. Chapter 13 bankruptcy.<\/p>\n\n\n\n

It\u2019s important to note that bankruptcy should be a last resort. It has serious consequences for your credit and immediate financial future, which means you may want to consider all other options first. Find out more about Chapter 7 vs. Chapter 13 bankruptcy below and then talk to a lawyer about what might be best for you\u2014many bankruptcy attorneys offer free consultations for this purpose.<\/p>\n\n\n\n

What Is Chapter 7 Bankruptcy?<\/h2>\n\n\n\n

Chapter 7 bankruptcy<\/a> is sometimes referred to as liquidation bankruptcy or the fresh start bankruptcy. \u00a0While every situation is handled according to the details of the case, the basic concept of Chapter 7 is that your non-exempt assets are liquidated to repay creditors and any remaining debt not covered is discharged in the bankruptcy.\u00a0 It should be noted that many families have no non-exempt assets, or very few non-exempt assets.<\/p>\n\n\n\n

How It Works<\/h3>\n\n\n\n

First, you go through a pre-filing credit counseling course and obtain a certificate that you file when you file a petition with the court for Chapter 7 bankruptcy.  Before filing chapter 7 you must perform the \u201cmeans test\u201d to determine whether you qualify for chapter 7 at all.  <\/p>\n\n\n\n

The means test considers your income for the preceding six months, your family size, and some other factors.  If you qualify for chapter 7 you can prepare and file your chapter 7 papers yourself, but most experts recommend working with a bankruptcy lawyer, as the process is complex. <\/p>\n\n\n\n

You must also submit records including lists of all your assets and debts, your current income and expenses, tax returns and other documents related to your financial status, including contracts like leases that might be in play.<\/p>\n\n\n\n

You\u2019ll also be required to go through credit counseling after your bankruptcy is filed, and submit a certificate that you did so\u2014if you work with a bankruptcy attorney, they usually help facilitate this.<\/p>\n\n\n\n

Most creditor activities against you, such as lawsuits, foreclosures and wage garnishments, must be halted as soon as you file the petition and the creditor finds out about it. This is known as the automatic stay.<\/p>\n\n\n\n

Within a few weeks, the bankruptcy trustee holds what is called a meeting of creditors. This is a hearing you must attend. You are placed under oath and the trustee, along with any present creditors, asks you questions. The trustee uses this information to determine whether you have any non-exempt assets or transactions that can be reversed. <\/p>\n\n\n\n

The trustee is looking to see if s\/he can obtain any money for your creditors. The trustee is also looking to insure that debtors are truthful and fully disclosing of their situation. <\/p>\n\n\n\n

Once the case proceeds past this point, your debts are discharged as agreed upon after liquidation of non-exempt assets (if any) occurs and funds are disbursed to various creditors by the trustee. Some of your assets are protected by exclusions, including certain personal items and clothing. <\/p>\n\n\n\n

You may also be able to keep a vehicle for the purpose of travel to and from work as well as your home, depending on how much equity you have in it.<\/p>\n\n\n\n

Eligibility Rules<\/h3>\n\n\n\n

Eligibility for Chapter 7 bankruptcy<\/a> depends on income and the application of a means test. <\/p>\n\n\n\n

You may be eligible for a Chapter 7 filing if you pass the rigorous requirements of the means test, a test which looks at your income for the last six months, your family size, and other items, and compares you to other persons of the same family size in your area to determine whether you qualify.<\/p>\n\n\n\n

Unsecured debt refers to debt that isn\u2019t secured by property. Vehicle and home loans are secured by property, meaning the bank can take that property if you don\u2019t pay to mitigate some of their losses. Credit cards are not usually secured, but may be in some instances. Priority unsecured debt refers to amounts you owe on taxes or child support. <\/p>\n\n\n\n

Nonpriority unsecured debts are items such as credit card debt, personal loans and medical debt.<\/p>\n\n\n\n

This is a lot of information, and it does sometimes get complex. But the bottom line is that if you have too much income, you may not be able to file Chapter 7.<\/strong> That\u2019s because the court assumes you have enough income to pay at least some<\/em> of your creditors.<\/p>\n\n\n\n

Pros<\/h3>\n\n\n\n

If you qualify for Chapter 7, it can help you start fresh with debt. In some circumstances, you may leave the bankruptcy with no debt at all. It\u2019s also faster than other forms of bankruptcy because there\u2019s no repayment plan period.<\/p>\n\n\n\n

Cons<\/h3>\n\n\n\n

Chapter 7 is looked at by future creditors as worse than Chapter 13 because it shows no effort to make any payment on debt owned. The Chapter 7 negative listing on your credit report will also show up for 10 years<\/a> after you file the petition.<\/p>\n\n\n\n

What Is Chapter 13 Bankruptcy?<\/h2>\n\n\n\n

A Chapter 13 bankruptcy<\/a> is a restructuring plan. You work through the bankruptcy trustee to pay some, but usually not all, of your debts over three to five years. If you meet all the requirements of the plan, your remaining debt may be discharged at the end of the bankruptcy.<\/p>\n\n\n\n

How It Works<\/h3>\n\n\n\n

Many of the processes associated with filing a Chapter 13 bankruptcy are the same as when you file a Chapter 7 bankruptcy. You take the pre-filing credit counseling course, file the petition, an automatic stay goes into place, you attend the meeting of creditors and then you work with the trustee via your attorney to make the appropriate payments every month.<\/p>\n\n\n\n

You pay the trustee as dictated by your bankruptcy plan.  Once the plan is approved by the court, the trustee then disburses that money to your creditors. If you miss your Chapter 13 bankruptcy payments, the trustee can file a motion to dismiss your case, and you would then owe all the debts and creditors could begin collections actions against you again. <\/p>\n\n\n\n

Once you complete the Chapter 13 bankruptcy repayment plan, you are typically entitled to a discharge of all remaining debts<\/a> under the bankruptcy.<\/p>\n\n\n\n

Eligibility Rules<\/h3>\n\n\n\n

Eligibility for Chapter 13 bankruptcy<\/a> depends on the amount of your debts as well as your ability to make payments as planned in your repayment plan.<\/p>\n\n\n\n