When preparing to file for bankruptcy, a lot is going through your mind. “How will I pay for this?”, “How will it affect my credit score?”, “What will I gain and lose?”. While these are all important questions, people often neglect the most fundamental question – Should you file for Chapter 7 or Chapter 13 bankruptcy? The decision you make can have profound implications on your case. That’s why you need to understand the difference so you can weigh it in light of your circumstance to choose the most advantageous to your situation.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy – also referred to as liquidation bankruptcy – is a legal proceeding in which the bankruptcy court discharges most or all of your debts. However, in exchange, you will have to surrender nonexempt assets like cash or property to the bankruptcy trustee, who then sells it and distribute the proceeds to your creditors. Exempt assets are determined by state laws and they vary from state to state. However, some common ones include:
Home Equity (also known as ‘homestead exemption’)
You can retain up to $23,675 in home equity (couples can retain up to $47,350). Some states have no homestead exemption, so make sure to check with a bankruptcy attorney in your jurisdiction.
Most states allow you to keep your vehicle as long as your equity in the vehicle doesn’t exceed some few thousand dollars (typically $3,775).
You can keep personal properties – like book instruments, appliances, and so on – up to $12,625. You may be able to keep your jewelry if its value is below $1,600.
Before you rush to use your retirement to settle your debt, know that you can legally exempt up to $1,283,025 from your retirement benefits.
Public benefits including welfare, unemployment insurance, and social security are fully protected.
Instruments that you use for your job are also protected during bankruptcy.
After all nonexempt assets are sold and paid to your creditors, all of your remaining unsecured debts like credit cards and medical bills are wiped off without the need for repayment.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, on the other hand, your debts are not wiped off. Instead, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you will have to pay depends on several factors like the amount and type of debt you owe, how much property you have, and your income level.
As a reward for your willingness to repay, you get to keep your property. The repayment plan typically lasts between three and five years. Chapter 13 bankruptcy can be seen as restructuring your debt rather than wiping it off.
Types of Debts You Have To Pay Back
Either you file for a Chapter 7 or Chapter 13 bankruptcy, certain types of debts cannot be discharged, meaning you still have to pay them after declaring bankruptcy. The major ones include:
- Child support
- Student loan
- Certain taxes
Major Differences Between Chapter 7 and Chapter 13 Bankruptcy
Now that we’ve examined the meaning of both types of bankruptcy, let’s now explore their differences. To do that, we’re going to consider major factors and see how they differ.
Who Can File?
Chapter 7 bankruptcy is available to individuals and business entities. On the other hand, Chapter 13 can only be filed by individuals (including sole proprietors).
To qualify for a Chapter 7 bankruptcy you have to have little disposable income. That’s why you’re required to take a Chapter 7 Means Test to help determine that.
As of April 2019, if you have more than $419,275 of unsecured debts or $1,257,850 of secured debts, you cannot file for Chapter 13 bankruptcy.
While it takes about three to four months to receive a discharge with Chapter 7, you have to make all agreed-upon payments to be discharged under Chapter 13. This period typically takes anywhere from three to five years.
What Happens To Your Property?
Under Chapter 7, the trustee can sell all nonexempt properties to pay creditors. But under chapter 13, you get to keep your properties but must pay unsecured creditors an amount equal to the value of your nonexempt assets.
By clearing off your debts on time, Chapter 7 gives you an earlier fresh start, unlike chapter 13 where you have to pay back your debts before thinking of such.
However, under chapter 13, you have a chance to meet up on missed mortgage and car payments, without losing them.
Duration on Your Credit Report
Bankruptcy is a major event that stays for long in your credit report. Chapter 7 will remain on your credit report for up to 10 years while chapter 13 will stay there for up to 7 years.
Impact on Credit
Both Chapter 7 and Chapter 13 bankruptcy will negatively impact your credit score, but chapter 7 has a more devastating effect because it indicates that some of your debts were wiped off. No creditor wants to lend to a person that may not pay their debt. However, this doesn’t mean you won’t be able to secure loans, you might just have to pay a lot more in terms of interest rates and fees when borrowing to compensate for the high risk the lender is taking.
On the other hand, Chapter 13 bankruptcy shows lenders that you were willing and worked towards repaying more of your debts. As a result, it is viewed more favorably than Chapter 7. So, the impact might not be as devastating.
It costs $335 to file for Chapter 7 bankruptcy and $310 to file for Chapter 13. You can ask the court for permission to pay in four monthly installments. And if you cannot afford it, you can apply to get the fees waived.
When going through a bankruptcy process, it is advisable to hire an attorney to help you to navigate the complexities involved. You are responsible to cover the attorney’s fees and it can lie anywhere from $1,500 to $4,000 depending on the type of bankruptcy you’re filing for and the complexity of your case.
Bankruptcy is a major legal decision with significant impacts. That’s why you have to carefully consider all your options – preferably, with a bankruptcy attorney. This enables you to know if there are other ways you can try to deal with your debts like debt restructuring or debt consolidation. If declaring bankruptcy is the best option, you will know whether to file for chapter 7 or chapter 13.
Declaring bankruptcy can be a deep psychological impact but it’s important to see it as a chance to get a fresh start. As you work your way towards improving your credit habits, you’ll improve your credit scores and in no time, you will once again attain financial buoyancy.
Don’t fight with bankruptcy legalese on your own. Contact us today for help!