Bankruptcy can help you out of financial difficulty and give you a much-needed lifeline. However, it is essential to understand the difference between the two most common types of bankruptcy, Chapter 7 and Chapter 13, to determine which is best for your situation.
Both types of bankruptcy offer benefits and drawbacks; the best option depends on your financial circumstances. Here is what you need to know.
How these two different processes work
Chapter 7 bankruptcy, also known as “liquidation bankruptcy,” is designed for individuals with limited income or assets. It involves the liquidation of non-exempt assets to pay off creditors (although most people who qualify have little or no assets that the court will seize). Any remaining unsecured debt is discharged, meaning you’re no longer legally obligated to pay it.
Chapter 13 bankruptcy, on the other hand, is a “reorganization bankruptcy.” It involves the creation of a repayment plan that consolidates your debts and allows you to pay them off over time. Unlike Chapter 7, you don’t have to liquidate your assets with Chapter 13 bankruptcy. Instead, you’ll make monthly payments to a trustee who will distribute the funds to your creditors. This allows for asset preservation, which can be helpful if there are assets you couldn’t otherwise keep with Chapter 7.
Do you qualify for Chapter 7 or Chapter 13?
To qualify for Chapter 7 bankruptcy, you must pass the “means test,” which compares your income to the state’s median income for your household size. If your income is below the median, you’re eligible for Chapter 7. However, if your income is above the median, you may still qualify based on other factors, such as your expenses and debts.
To qualify for Chapter 13 bankruptcy, you must have a regular income and debts within the specified limits. The court will also review your repayment plan to ensure it’s feasible based on your income and expenses.
Make an informed decision
It helps to have a complete picture of what you are signing up for if you are contemplating filing for bankruptcy. Should you have any questions or are unsure about the path to take, an informed assessment of your financial situation will help you make decisions that are in your best interests.