Differences Between Chapter 7 And Chapter 13 Bankruptcy
If you find yourself unable to repay your debts and your creditors are threatening to sue, seeking bankruptcy protection may be the best solution to your financial problems. There are two chapters of the U.S. Bankruptcy Code that apply to consumers: Chapter 7 and Chapter 13. Under Chapter 7 bankruptcy, your debts are eliminated and your non-exempt assets are liquidated in order to repay your creditors. With Chapter 13, you repay your debts over time but keep your assets. If you’re contemplating filing for bankruptcy protection, it’s important to understand the key differences between Chapter 7 and Chapter 13. (To learn about common myths associated with bankruptcy, see 10 Common Myths About Declaring Consumer Bankruptcy.)
Eligibility Requirements For Filing Bankruptcy
The means test is the standard which determines whether you’re eligible to file for Chapter 7 or Chapter 13 bankruptcy. The means test looks at your median income for the previous six months and compares it to the median income limit for your family size in your state. Median income limits for the means test are based on U.S. Census Bureau data. If your median income for your household size is equal to or less than the limit allowed for your state, you automatically qualify for Chapter 7. There is no limit to the amount of secured or unsecured debt you may include in a Chapter 7 filing.
If your median income exceeds the allowed limit, you must file Chapter 13 unless you can demonstrate that your monthly income is not sufficient to allow you to make regular payments towards your debts after you’ve paid all of your other expenses. If you plan to file Chapter 13 bankruptcy, you are also limited as to the amount of debt you can include in your filing. As of April 2012, debtors could claim a maximum of $360,475 in unsecured debt and $1,081,400 in secured debt in a Chapter 13 bankruptcy filing. Both Chapter 7 and Chapter 13 filers are also required to complete an approved credit counseling course within 180 days prior to filing.
Discharge Of Debts
Chapter 7 bankruptcy is designed to give debtors a fresh start financially by effectively wiping the slate clean. Your liability for any debts included in the bankruptcy filing is eliminated once your case is discharged. With a Chapter 7 filing, discharge typically occurs within three to six months following the date you submit your petition to the appropriate bankruptcy court. Before you can receive your discharge, you must attend a 341 meeting or meeting of creditors and complete a second course in financial education.
Chapter 13 bankruptcy gives debtors the opportunity to repay some or all of what they owe over time without having to surrender any of their assets. Within 14 days of filing your bankruptcy petition, you must submit a detailed repayment plan to the bankruptcy court which specifies how you will repay your outstanding debts. Your repayment plan will generally last between three to five years and is based on your income. During the repayment period, you must make your payments each month to the bankruptcy trustee or administrator who is charged with overseeing your case. Once all plan payments have been completed, your bankruptcy case will be discharged. If you fall behind on your plan payments, the court may choose to dismiss your bankruptcy petition which will leave creditors free to resume pursuit of claims against you.
Treatment Of Assets
When you file a Chapter 7 petition, you must provide the bankruptcy trustee with a list of any assets you own, including your home, your vehicle, bank accounts, jewelry, etc. along with an estimate of the item’s fair market value. The trustee will liquidate these assets and distribute the proceeds among your creditors. Under the federal bankruptcy code, Chapter 7 debtors are allowed to exempt a certain amount of assets according to federal or state guidelines. The exemption limits allow you to protect your home equity, keep your car or protect other assets. If the value of an asset exceeds the exemption limit, you may be forced to surrender it to the trustee unless he’s willing to let you pay the difference in order to keep it. Depending on where you live, you may be able to choose whether you use federal or state exemptions, based on which system offers the most benefit.
With a Chapter 13 bankruptcy, you can keep your assets but you must still provide an estimate of their value to the bankruptcy trustee. The trustee uses the total value of your assets to determine whether the terms of your repayment plan are fair to your creditors. Specifically, your repayment plan must provide the creditor with at least the same amount of money they would receive if your assets were seized and liquidated.
Impact On Your Credit
Filing bankruptcy has a significant negative impact on your credit, regardless of which chapter you file. Generally, Chapter 7 bankruptcy can remain on your credit report for up to ten years while Chapter 13 can be reported for up to seven years. A bankruptcy filing can result in a significant drop in your credit score and it will likely make it difficult to obtain new credit right away. If you are able to obtain a credit card, loan or line of credit, your lender is likely to charge you a much higher interest rate than they would if you had good credit. The negative impact of bankruptcy lessens over time but generally, it may take several years to get your credit back on track. You may consider applying for a secured credit card account during this period in order to begin rebuilding your credit history. (To learn more about secured credit cards, see The 6 Best Credit Cards For Bad Credit.)
While filing bankruptcy can help you to regain your financial footing, it’s just one of many options that you should consider if you’re struggling to manage your debt. You should carefully weigh the pros and cons of both Chapter 7 and Chapter 13 before you commit to filing bankruptcy.