Chapter 7 Bankruptcy vs. Chapter 13 |
Posted: January 23, 2023 |
When it comes to filing for bankruptcy, individuals and businesses have a few different options to choose from, with the most common being Chapter 7 and Chapter 13. While both types of bankruptcy can provide a way to discharge certain debts and get a fresh start financially, there are key differences between the two that can make one option more appropriate than the other depending on your specific situation. Chapter 7, also known as a "liquidation" bankruptcy, is the most common type of bankruptcy filed by individuals. It involves the sale of certain assets to pay off creditors, with the goal of allowing the debtor to get out of debt quickly. To be eligible for Chapter 7, individuals must pass a means test, which compares their income to the median income of their state and takes into account their expenses and debts. If their income is below the median, they are eligible to file for Chapter 7. Businesses are not subject to the means test. Chapter 13, also known as a "reorganization" bankruptcy, is a type of bankruptcy that is typically filed by individuals with regular income who have a significant amount of debt. It allows the debtor to keep their assets and pay off their debts over a period of three to five years through a court-approved repayment plan. To be eligible for Chapter 13, individuals must have a regular income and their unsecured debt must be less than $394,725 and secured debt less than $1,184,200. In Chapter 7, certain assets, such as a primary residence and personal property, may be protected by exemptions. However, not all debts can be discharged through Chapter 7, such as student loans, taxes, and child support. On the other hand, in Chapter 13, the debtor gets to keep their assets and also gets to pay off their debts over a period of three to five years through a court-approved repayment plan. It is important to note that both Chapter 7 and Chapter 13 have an impact on credit score, and the choice between the two will depend on the individual's financial situation and specific needs. It's always recommended to consult with a bankruptcy attorney to understand the eligibility and process of filing for Chapter 7 or Chapter 13 bankruptcy and which debts can be discharged. They can help you understand your options and make informed decisions about your financial future.
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