Chapter 7 vs Chapter 13 Bankruptcy: How Are They Different?

People are becoming more decisive about their financial futures. In the year ending June 2024, more than 486,000 Americans filed for bankruptcy, a 16.2% increase since the previous year. But figuring out the next move isn’t always as simple. Chapter 7, Chapter 13—what do they mean, and how do you know which is right for you? At Gertz & Rosen, we have over 45 years of experience in bankruptcy law, and we’re here to share our insights. In this post, we’ll break down how Chapter 7 and Chapter 13 bankruptcy differ, enabling you to take charge of your finances with confidence and peace of mind.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, or “liquidation bankruptcy,” is designed for individuals or businesses that don’t have the means to repay their debts. Its primary focus is on discharging eligible debts and allowing filers to start fresh. Here’s how it works:

Key Features of Chapter 7 Bankruptcy

• Liquidation of Non-Exempt Assets: A trustee is appointed to oversee the sale of non-essential assets. The proceeds are used to pay creditors. However, many assets, like necessary household belongings or tools of trade, are considered exempt and can be retained.
• Eligibility Requirements: Individuals and businesses can file, but eligibility isn’t guaranteed. To qualify, you must pass a means test that evaluates your income against your state’s median income.
• Quick Discharge Timeline: One of the fastest bankruptcy processes, Chapter 7 typically resolves in about four months, providing quick debt relief.

What Is Chapter 13 Bankruptcy?

Unlike Chapter 7, Chapter 13 focuses on debt reorganization rather than liquidation. It’s often referred to as the “wage earner’s plan” because it allows people with a steady income to retain their assets while repaying debts through a structured payment plan.

Key Features of Chapter 13 Bankruptcy

• Reorganization of Debt: Filers propose a repayment plan that spans three to five years based on their disposable income. After the plan ends, the remaining eligible debts are discharged.
• Eligibility Requirements: Individuals and sole proprietors can file, but there are debt limits. Your secured and unsecured debts must be under specific thresholds to qualify.
• Asset Protection: Unlike Chapter 7, Chapter 13 allows you to retain your property, including your home or vehicle, as long as you make the required payments under the plan.

Key Differences Chapter 7 vs Chapter 13

When trying to choose between Chapter 7 and Chapter 13, understanding the differences is essential. Here’s a comparison:

1. Eligibility

– Chapter 7: Requires passing the means test for low-income individuals or businesses.

– Chapter 13: Requires a steady income and must fall within debt limits.

2. Assets

– Chapter 7: Non-exempt assets are sold off to pay creditors; many people can retain essential property.

– Chapter 13: Lets you keep all of your assets while repaying debts over time.

3. Debt Discharge

– Chapter 7: Most debts are discharged in about four months.

– Chapter 13: Discharge occurs after completing the repayment plan, which lasts three to five years.

Which Bankruptcy Option Is Right for You?

Knowing which type of bankruptcy to file depends on your financial situation and goals.

When Chapter 7 Might Be the Better Option

Chapter 7 is typically suited for individuals or businesses with no disposable income and significant unsecured debts, like hospital bills or credit card debt. It’s a good option if you don’t have substantial assets to protect and need a quicker resolution to eliminate debt.

When Chapter 13 Might Be the Better Option

Chapter 13 is often a reasonable choice for those who have a steady income and want to keep important assets, such as a home or car, while catching up on missed payments. It’s also ideal for individuals looking to reorganize debt into a manageable repayment plan over time.

The Importance of Professional Guidance

Choosing between Chapter 7 and Chapter 13 is a life-altering decision with long-term repercussions. Consulting with experienced bankruptcy attorneys ensures that you fully understand the implications of each option.

Find the Best Path Forward

Understanding the differences between Chapter 7 and Chapter 13 bankruptcy is essential when deciding on your financial future. Both offer significant benefits, but their suitability depends on your unique circumstances. Whether you’re seeking a quick discharge of debt or a plan to protect your assets, legal professionals can help make the process successful.

Take the first step toward financial freedom with Gertz & Rosen. Contact us today to schedule your consultation, and let our experienced team guide you with personalized strategies to manage debt, build wealth, and secure your financial future.