Not all bankruptcies are created equal. While there are many types of bankruptcy, it is most common to hear about individuals filing a Chapter 7 or Chapter 13. Read on below to learn more about the difference between Chapter 7 and Chapter 13 bankruptcy.
Chapter 7- Liquidation
Chapter 7 is the most commonly filed bankruptcy amongst individuals. If a person finds themselves owing more money to creditors than they have, or can foreseeably earn, Chapter 7 is the best option. The assets that a person owns will be liquated and used to pay off their debts. After that, the bankruptcy is usually dismissed. Chapter 7 is often referred to as a “fresh start”.
Chapter 7 works best for people with low-income and little to no assets. To determine their eligibility, the individual must take a means test as provided by the U.S. Bankruptcy Court. If the individual makes too much money, they’ll have to consider filing for Chapter 13.
Chapter 13- Reorganization
Chapter 13 is often called the “wage earner” bankruptcy, because the individual must have a reliable source of income. Their finances are reorganized into a plan that allows them to pay back their creditors over three to five years while maintaining control and ownership of their assets.
Chapter 13 works best for people who don’t qualify for Chapter 7 but need debt relief, have non-dischargeable debts like child support, or have fallen behind on house/car payments and want to/can catch up on payments.
A Visual Aide
If you are more of a visual learner, reference the chart below:
|CHAPTER 7||CHAPTER 13|
|WHO CAN FILE?||Individuals & Business||Individuals Only (No Businesses)|
|ELIGIBILITY||Based on income, the U.S. Bankruptcy Court provides mean tests to determine eligibility.||Cannot have more than $394,725 of unsecured debt or $1,184,200 of secured debt.|
|TYPICAL DISCHARGE TIME FRAME||3-4 Months||3-5 years|
|WHAT HAPPENS TO PROPERTY?||Trustee can sell certain property to pay creditors.||Debtors keep property, but must make pre-determined payments to unsecured creditors.|
|WHAT HAPPENS TO LOAN BALANCE ON SECURED DEBTS?||Can be reduced, but only on tangible personal property.||Can be reduced if certain requirements are satisfied.|
|ADVANTAGE||Qualified debts can be discharged quickly, giving debtors a “fresh start.”||Debtors are allowed to keep their property and “catch up” on missed payments.|
|DISADVANTAGE||Trustee can sell property, does not allow debtor to “catch up” on missed payments. Does not avoid foreclosure or repossession.||Must make consistent monthly payments to the Trustee. Must actually pay back a portion of debt.|
Hire A Bankruptcy Attorney
If you are considering filing a Chapter 7 or Chapter 13, give Kamper & Estrada, PLLC a call and learn what your options are. Our experienced bankruptcy lawyer Phoenix, AZ residents trust offers a free one-hour consultation.