Chapter 7 vs. Chapter 13 Bankruptcy: The Key Differences
There are many different kinds of bankruptcy, each with a different purpose: Chapter 11 for individuals or corporations with high debt, Chapter 12 for family farmers and fishermen, Chapter 9 for municipalities, and so forth. However, for most people, the choice when considering bankruptcy is whether to choose a Chapter 7 or a Chapter 13. So what is the difference between the two?
Chapter 7 – Liquidation Bankruptcy
A Chapter 7 is sometimes called “liquidation” or “total” bankruptcy, although neither of those terms is accurate. It usually lasts (3) to (4) months, and discharges—or, eliminates the obligation for—any debt that can be discharged, such as medical debt, or most credit card debt.
A person can only file one Chapter 7 every (8) years, calculated as filing date to filing date. If you have filed a Chapter 7 within (8) years and find yourself needing to file bankruptcy again, a Chapter 13 may be an option for you.
Additionally, one must qualify for a Chapter 7 by being under a certain income limit. This calculation is called the Means Test, and is done by taking a person’s gross income from all sources (except social security), comparing it against the median in your state for your family size. If you are under that limit, you automatically qualify for a Chapter 7. If you are over, you may still qualify, but you would need an attorney to calculate the second part of the Means Test to see if you might qualify.
Chapter 13 – Reorganization Bankruptcy
A Chapter 13 is a reorganization of your debt. There is a “plan payment” associated with a Chapter 13 bankruptcy, and is intended to be both affordable, but also to pay what must be paid in the bankruptcy. A Chapter 13 lasts at least (3) and no more than (5) years.
People choose a Chapter 13 for various reasons, including:
- Catching up on mortgage payments;
- Repaying tax debt;
- Getting current on child or spousal support payments;
- Needing bankruptcy relief but not qualified for Chapter 7;
- A personal preference to repay a portion of the debts owed.
If you are struggling with your debt, call me today at 419-776-2145 to discuss what your options are.