Bankruptcy is designed to help individuals and businesses eliminate or repay their debts under the protection of the federal bankruptcy court. Two of the most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. Understanding the differences between these two can be crucial in deciding which option is best for you.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy, referred to as liquidation bankruptcy, is designed to eliminate most of your unsecured debts, such as credit card debt and medical bills. Here’s what you need to know about Chapter 7:
1. Eligibility: Not everyone can file for Chapter 7 bankruptcy. Eligibility is primarily determined by your gross (pre-tax) household income. If your income is less than the median income for a household of your size in your state, you can file for Chapter 7. Otherwise, you must pass the “means test” – a calculation to determine if you have enough disposable income to repay some of your debts.
2. Process: Chapter 7 involves liquidating your non-exempt assets (property that you own) to pay off as much debt as possible. The bankruptcy trustee appointed to your case will sell these assets and distribute the proceeds to your creditors. Don’t let this scare you though. You are allowed to keep all assets protected by exemptions as explained below.
3. Exemptions: Certain assets are considered exempt and can be kept during and after bankruptcy. These exemptions vary by state and may include items like equity in your home, car, personal belongings, and retirement accounts. For example, Indiana allows you to fully exempt (protect) qualified retirement accounts.
4. Discharge of Debts: Most of your unsecured debts will be discharged at the end of the process, which typically takes 3-6 months. This means you are no longer legally required to pay these debts.
5. Impact on Credit: Chapter 7 bankruptcy stays on your credit report for 10 years. However, it is possible to quickly rebuild your credit after a chapter 7 bankruptcy.
Chapter 13 Bankruptcy: Reorganization
Chapter 13 bankruptcy, on the other hand, is more about reorganizing your debts rather than eliminating them outright. Key aspects include:
1. Eligibility: Chapter 13 is available to individuals who have a regular income. There are caps on the amount of debt for chapter 13 bankruptcy, but it is rare to exceed these.
2. Repayment Plan: Under Chapter 13, you propose a repayment plan to make installments to creditors over three to five years. This plan must be approved by the court.
3. Keeping Assets: One of the main benefits of Chapter 13 is the ability to keep your assets, including your home and car, as long as you continue to make payments according to the plan.
4. Debt Limits: Chapter 13 involves repaying a portion of your debts, but some may be discharged at the end of your payment plan. Moreover, creditors are required to file a claim in your case. If they do not, that debt may be discharged as well.
5. Impact on Credit: Chapter 13 remains on your credit report for 7 years. Rebuilding credit is much slower in a chapter 13 bankruptcy, but creditors tend to look more favorably on attempts to repay the debt versus eliminating it outright.
Choosing the Right Path
Deciding between Chapter 7 and Chapter 13 bankruptcy is a significant decision that depends on your specific financial situation, including your income, debts, and assets. It's advisable to consult with a knowledgeable and skilled bankruptcy attorney who can provide guidance based on your individual circumstances. Remember, bankruptcy should be viewed as a tool for financial recovery and a step towards a debt-free future.
If you are interested in discussing how bankruptcy can improve your financial situation, please contact Matthew Cree for a FREE, no obligation consultation, by clicking here.