Bankruptcy Goals: Understanding the Differences Between Chapter 7 and Chapter 13
When facing overwhelming debt, bankruptcy can possibly offer a fresh financial start. It provides legal avenues to either discharge or restructure debts, allowing individuals to manage or eliminate their obligations. However, the complexities of bankruptcy law mean it’s essential to consult a qualified legal professional to navigate your specific situation. Two of the most common types of bankruptcy for individuals are Chapter 7 and Chapter 13, each offering distinct benefits and requirements. Understanding these differences can help you understand the best path for your financial recovery.
Chapter 7 Bankruptcy: A Fresh Start Through Liquidation
Overview: Chapter 7, often called “liquidation bankruptcy,” is designed to quickly discharge most unsecured debts, such as credit card balances, medical bills, and personal loans. The process usually takes around four months, offering a swift resolution for those with limited income. While Chapter 7 can discharge secured debts like mortgages or car loans, it doesn’t remove the lien on the property, meaning creditors could still foreclose or repossess unless you continue making payments.
Qualifications:
- Means Test: Your income must be below your state’s median income to qualify. If it’s higher, you may need to file for Chapter 13 instead.
- Disposable Income: Even if your income exceeds the median, you could still qualify if your disposable income (after essential expenses) is too low to make payments under a Chapter 13 plan.
Costs:
- Filing Fee: $338 (standard across the U.S.).
- Attorney Fees: Typically ranges from $1,000 to $2,000 in Tennessee, depending on the complexity of the case.
- Credit Counseling and Debtor Education: Required courses usually cost between $10 and $50 each.
Key Points:
- Timeframe: Can be completed within four months.
- Cost: Less expensive than Chapter 13 but often requires upfront payment.
- Credit Impact: Remains on your credit report for 10 years.
- Income Consideration: Best for those with lower or inconsistent income.
Chapter 13 Bankruptcy: Reorganizing Debt While Protecting Assets
Overview: Chapter 13, also known as the “wage earner’s plan,” allows individuals with stable income to keep their property by reorganizing their debt into a manageable payment plan over three to five years. Unlike Chapter 7, which liquidates assets, Chapter 13 helps you catch up on missed payments, such as a mortgage, and avoid foreclosure.
Qualifications:
- Income Stability: You must have a regular income to make monthly payments.
- Debt Limits: Unsecured debts must be under $419,275, and secured debts under $1,257,850.
- Past Bankruptcy: If you’ve filed for bankruptcy in the past few years, you may not be eligible.
Costs:
- Filing Fee: $313.
- Attorney Fees: Higher than Chapter 7, ranging from $3,000 to $4,500 in Tennessee, with a portion included in your repayment plan.
- Credit Counseling and Debtor Education: Similar to Chapter 7, costs range from $10 to $50 each.
Key Points:
- Timeframe: Takes 3 to 5 years to complete.
- Home Protection: Can stop foreclosure and allow you to catch up on missed payments.
- Cost: Generally more expensive due to the longer duration and higher attorney fees.
- Credit Impact: Remains on your credit report for seven years, but credit may recover faster with consistent payments.
Conclusion
Choosing between Chapter 7 and Chapter 13 depends on your financial situation. Chapter 7 is ideal for those needing a quick fresh start with limited income, while Chapter 13 suits those with stable income who wish to protect their assets. Always consult with a bankruptcy attorney to ensure you understand the implications of each option and make the best decision for your financial future.
