We've discussed bankruptcy before on our blog, and that's because there is a staggering amount of information out there to sift through. And in that amount, there are a lot of words that you might not know the meaning of, or are easy to misinterpret. Today, we’re going to address the differences between filing chapter 7 and chapter 13 bankruptcy in an effort to help you figure out your next steps toward securing a viable financial future.
First, we should identify what bankruptcy is, and what it’s used for.
Bankruptcy is supposed to be a solution for a debtor (that’s the borrowing party) in order to provide a “fresh start”, despite insolvency. Insolvency is just a fancy word for being unable to pay your debts. It’s also a solution for creditors (the institution lending money) to help recoup the money it has loaned to the person declaring bankruptcy.
Chapter 7 bankruptcy is a liquidation of your assets in order to pay off as much of your debt as possible. It is also the most commonly applied for type of bankruptcy.
While you can lose property when filing, many don’t. If you own a BMW and a Lexus, for instance, you probably aren’t going to get to keep both. But, if you have very little to begin with, most of the time you will be able to keep your property unless you have put it up for collateral on a loan. Once your assets have been liquidated, the money is split between your creditors and you retain only exempt assets.
Most people prefer this form of bankruptcy because it doesn’t require you to repay any portion of your debts. However, you must complete a “means test” which determines your eligibility. As a general rule, if you make above the state median income, you will have difficulty qualifying for chapter 7.
It’s also important to note that there exists such a thing as non-dischargeable debt. This includes, but is not limited to, student loans, recent taxes, and unpaid child support. Most of these also apply to chapter 13, with very few exceptions.
Chapter 13 bankruptcy is a reorganization of existing debt which sets up a repayment plan over the course of three to five years. You must complete the entire term of repayment in order to have the remainder of your debt discharged. In some cases, a hardship can be obtained to shorten and forgive the remaining amount.
In chapter 13, your assets such as your home and property can be preserved if you successfully complete the term of your repayment, depending on the value of your assets. We suggest consulting your attorney as these situations are very specific in context.
No matter what type of bankruptcy you file for, your credit will be affected. Both types show on your credit report for several years. Chapter 13 may be more preferable, since successful completion will repay more debt than chapter 7.
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