Understanding The Differences Between Chapter 7 And Chapter 13 Bankruptcies
Posted on: 9 December 2017
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No one plans to default on their debts, but when life doesn't work out according to plan, you may find yourself quickly falling very behind on your mortgage, car payment, credit card payments and other debts. If you're struggling to make your minimum monthly payments or you're facing foreclosure or collections, filing for bankruptcy might be in your best interest. There are two different major types of bankruptcies filed by individuals: Chapter 7 and Chapter 13. Understanding the differences between them will help you decide which option will have the best outcome for you.
Basic Differences
At a very basic level, Chapter 7 is a bankruptcy that completely eliminates unsecured debts, such as medical bills and credit cards. Chapter 7 is a liquidation bankruptcy, which means most of your personal property is sold to pay your creditors before your debt slate is wiped clean. Chapter 13 is a form of bankruptcy for people who make too much money or have too many assets to qualify for Chapter 7. Chapter 13 is considered a reorganization bankruptcy, meaning all of your property won't be liquidated, but you'll have to pay back all or most of your debts through a repayment plan negotiated in court.
Income
Your income is the primary aspect that will determine whether filing Chapter 13 or Chapter 7 bankruptcy is right for you. If you have a lot of disposable income, you probably won't qualify for Chapter 7. In order to file Chapter 7, your disposable income must meet the Chapter 7 Means Test, which takes your average income over the last six months prior to filing for bankruptcy and determines what your disposable income is by deducting certain monthly expenses to determine how much of your income is disposable. The Means Test takes your household size into account and compares your income with the median income for a household that size in your state. You are allowed to deduct expenses, such as standard deductions for housing and utilities.
Debts Included
Most debts are included in both Chapter 7 and Chapter 13 bankruptcies, but some debts are not discharged in either type. Debts you owe for child support, alimony and student loans are common examples of debts you may have that won't be discharged in your bankruptcy. There is an important difference between the two types of bankruptcy if you have a mortgage or a car loan. If you file Chapter 7, your house and car will be returned to your creditor to sell. If you file Chapter 13, you can usually keep your home and car as long as you stay current with your court-ordered repayment plan.
Nonexempt Property
There are two categories your personal belongings will fall into during a bankruptcy: exempt and nonexempt. Exempt property includes vehicles up to a certain value, necessary household furnishings, jewelry up to a certain value, necessary clothing, household appliances, a portion of your earned but unpaid wages, personal injury award damages, public benefits and pensions. Nonexempt property includes collections, second homes, second vehicles, antiques, family heirlooms, investments, musical instruments, any clothing or jewelry that isn't considered reasonably necessary or is above a certain value and cash.
If you have valuable, nonexempt property that you want to keep, Chapter 13 is most likely the best type of bankruptcy for you as long as you can keep up with your repayment plan. If you file Chapter 7, you'll have to surrender your nonexempt property to a bankruptcy trustee to sell to pay your creditors unless you can pay the trustee the fair market value of the property you want to keep.
Understanding all of the laws involving bankruptcy can be very difficult. If you're still not sure which type of bankruptcy filing would be best for you, consult with an attorney experienced in bankruptcies. Many of them will offer a free initial consultation where you can bring records of your financial information, including debts and any property you own, so the attorney can advise you on whether bankruptcy is a good idea and, if so, whether Chapter 7 or Chapter 13 would be best for your personal situation.