Most individuals contemplating a personal bankruptcy filing have two options. They usually choose either Chapter 7 or Chapter 13 bankruptcy proceedings. Each person’s financial needs are different, and each type of bankruptcy offers different protections.
Those who are unsure whether Chapter 7 or Chapter 13 is better for them may want to learn more about what differentiates these two forms of bankruptcy before sitting down to discuss their options with a bankruptcy attorney. What are the most important things that differentiate a Chapter 7 bankruptcy from a Chapter 13 filing?
1. Income limits for Chapter 7
The Chapter 7 bankruptcy process is relatively rapid. Filers can potentially complete the entire process in less than six months, depending on the complexity of the case and the volume of pending cases in the courts.
However, those filing for Chapter 7 bankruptcy must qualify based on their income. The means testing process requires making adjustments to income levels based on the last six months of earned income and then comparing that amount to the median income for a household of the same size in the same state. Those who do not pass the means tests are ineligible for Chapter 7 bankruptcy.
2. Payment plans or liquidation
People often refer to Chapter 7 bankruptcy as “liquidation bankruptcy,” while they may call Chapter 13 bankruptcy a “wage earner’s plan.” People who are eligible for Chapter 7 bankruptcy must provide an inventory of their resources for the court-appointed trustee to review.
They may have to liquidate any property they cannot exempt. Liquidation isn’t necessary in a Chapter 13 bankruptcy. Instead, the filer must negotiate a repayment plan. They then make between three and five years of structured payments that the court-appointed trustee distributes to their various creditors.
3. Credit reporting rules
A bankruptcy discharge typically appears on an individual’s credit report. How long the credit bureaus can maintain a record of a prior bankruptcy depends on the type of bankruptcy filed. Chapter 7 cases remain on a credit report for up to 10 years after an individual receives their discharge.
Chapter 13 cases can come off an individual’s credit report after seven years, much like any other blemish. Filers who are fastidious about rebuilding their credit may become eligible for new lines of credit or even mortgages before the prior bankruptcy filing technically comes off of their record.
Reviewing financial obligations and resources can help people determine the best type of bankruptcy to pursue. Individuals facing foreclosure, creditor lawsuits and unsustainable debt levels may benefit from pursuing personal bankruptcy before the situation spirals completely out of control.