Two Main Options For Consumers Filing Bankruptcy

When consumers consider filing for bankruptcy, they typically have two main options: Chapter 7 and Chapter 13. Each type of bankruptcy has its own process, eligibility requirements, advantages, and disadvantages. Here’s a detailed look at both options:

Chapter 7 Bankruptcy

Overview: Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the discharge of most unsecured debts, allowing the debtor to start fresh. This type of bankruptcy is best suited for individuals with limited income and significant unsecured debt.

Eligibility:

• Means Test: To qualify for Chapter 7, you must pass a means test. This test compares your income to the median income of your state for a household of your size. If your income is below the median, you automatically qualify. If it’s above, further calculations determine eligibility based on your disposable income.
• Previous Bankruptcies: You must not have filed a Chapter 7 bankruptcy in the past 8 years or a Chapter 13 in the past 6 years.

Process:

1. Credit Counseling: Complete a credit counseling course from an approved agency within 180 days before filing.
2. Filing the Petition: Submit a bankruptcy petition along with detailed schedules of assets, liabilities, income, and expenses to the bankruptcy court.
3. Automatic Stay: Upon filing, an automatic stay goes into effect, halting most collection actions, foreclosures, and repossessions.
4. Trustee Appointment: The court appoints a trustee to oversee your case. The trustee reviews your documents, sells non-exempt assets, and distributes the proceeds to creditors.
5. 341 Meeting: Attend a meeting of creditors where the trustee and creditors can ask questions about your financial situation.
6. Discharge: Typically, 3 to 6 months after filing, you receive a discharge of eligible debts, meaning you are no longer legally required to pay them.

Advantages:

• Quick Process: Chapter 7 is generally faster, often completed within a few months.
• Debt Discharge: Most unsecured debts, such as credit card debt and medical bills, are discharged.
• Fresh Start: Provides a clean financial slate.

Disadvantages:

• Asset Liquidation: Non-exempt assets may be sold to pay creditors.
• Credit Impact: Stays on your credit report for up to 10 years, significantly impacting your credit score.
• Non-Dischargeable Debts: Some debts, like student loans, child support, and certain taxes, are not discharged.

Chapter 13 Bankruptcy

Overview: Chapter 13 bankruptcy, known as “reorganization bankruptcy,” allows debtors to keep their property and repay debts over time (3 to 5 years) based on a court-approved repayment plan. This type of bankruptcy is suitable for individuals with a regular income who can afford to pay back at least a portion of their debts.

Eligibility:

• Regular Income: Must have a regular income to make payments under the plan.
• Debt Limits: Your secured debts must be less than $1,257,850 and unsecured debts less than $419,275 (as of 2021, adjusted periodically for inflation).
• Previous Bankruptcies: You must not have had a Chapter 13 discharge in the past 2 years or a Chapter 7 discharge in the past 4 years.

Process:

1. Credit Counseling: Complete a credit counseling course from an approved agency within 180 days before filing.
2. Filing the Petition: Submit a bankruptcy petition and proposed repayment plan to the bankruptcy court.
3. Automatic Stay: An automatic stay goes into effect, stopping most collection actions.
4. Trustee Appointment: The court appoints a trustee to oversee your case and manage the repayment plan.
5. 341 Meeting: Attend a meeting of creditors.
6. Repayment Plan Approval: The court approves (confirms) your repayment plan, and you begin making payments to the trustee, who distributes funds to creditors.
7. Discharge: After successfully completing the repayment plan, remaining eligible debts are discharged.

Advantages:

• Asset Retention: Allows you to keep your home, car, and other assets.
• Debt Restructuring: Provides a structured plan to pay back debts over time.
• Credit Impact: Remains on your credit report for 7 years, which is shorter than Chapter 7.

Disadvantages:

• Longer Process: The repayment plan lasts 3 to 5 years, requiring ongoing financial discipline.
• Payment Obligation: You must have sufficient income to meet the repayment plan requirements.
• Credit Impact: Still significantly impacts your credit score, although for a shorter period than Chapter 7.

Choosing between Chapter 7 and Chapter 13 bankruptcy depends on your financial situation, types of debt, and long-term financial goals. Chapter 7 offers a quicker discharge of debts but may require asset liquidation, whereas Chapter 13 allows you to keep your assets and repay debts over time but involves a longer commitment. Consulting with a bankruptcy attorney can help you determine the best option for your specific circumstances and ensure you navigate the process effectively.

Chapter 7 Bankruptcy