Bankruptcy is a legal process designed to provide relief to individuals and businesses struggling with overwhelming debt. Two common forms of bankruptcy for individuals are Chapter 13 and Chapter 7. While both aim to alleviate debt, they operate in different ways and serve different purposes. In this article, we’ll explore the key differences between Chapter 13 and Chapter 7 bankruptcy to help you understand which may be the right option for your financial situation.
Just because you had a bankruptcy, it does not necessarily disqualify you from buying a new home. Read below to see the differences between the two types.
Chapter 7 Bankruptcy
- Liquidation: Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the liquidation of non-exempt assets to pay off creditors. A court-appointed trustee sells the debtor’s non-exempt property and distributes the proceeds to creditors.
- Income Qualification: To qualify for Chapter 7 bankruptcy, debtors must pass the means test, which evaluates their income and expenses to determine eligibility. Those with insufficient income to repay their debts may qualify for Chapter 7.
- Discharge of Debts: Chapter 7 bankruptcy typically results in the discharge of most unsecured debts, such as credit card debt, medical bills, and personal loans. However, certain debts, such as student loans, child support, and recent taxes, may not be dischargeable.
- Exempt Property: Debtors can keep certain “exempt” property, such as primary residences, vehicles (up to a certain value), household goods, and retirement accounts, depending on state and federal bankruptcy exemptions.
- Process Duration: Chapter 7 bankruptcy proceedings typically last around three to six months, after which the debtor receives a discharge of eligible debts.
Chapter 13 Bankruptcy
- Repayment Plan: Chapter 13 bankruptcy, known as “reorganization bankruptcy,” involves creating a court-approved repayment plan to repay creditors over a period of three to five years. Debtors can keep their property and catch up on missed mortgage or car payments through the repayment plan.
- Income Requirement: Unlike Chapter 7, there is no means test requirement for Chapter 13 bankruptcy. However, debtors must have a regular income to propose a feasible repayment plan.
- Debt Discharge: Upon successful completion of the repayment plan, debtors may receive a discharge of remaining eligible debts, even if they haven’t paid them in full. This discharge can include certain debts that are not dischargeable in Chapter 7, such as overdue mortgage payments and tax debts.
- Property Retention: Debtors can retain all of their property, including non-exempt assets, as long as they fulfill the terms of the repayment plan and continue making payments to secured creditors.
- Process Duration: Chapter 13 bankruptcy proceedings typically last three to five years, during which debtors make monthly payments to the bankruptcy trustee, who distributes the funds to creditors according to the approved plan.
Choosing the Right Option
Deciding between Chapter 7 and Chapter 13 bankruptcy depends on various factors, including income, assets, debts, and financial goals. Individuals with minimal assets and low income may benefit from Chapter 7, while those with a steady income and valuable assets may find Chapter 13 to be a more suitable option for debt repayment and asset retention.
It’s essential to consult with a qualified bankruptcy attorney or financial advisor to evaluate your financial situation and determine the best course of action. With careful consideration and professional guidance, you can navigate the bankruptcy process effectively and work towards a fresh financial start.
Just because you had a bankruptcy, it does not necessarily disqualify you from buying a new home. Connect with us today so that we can discuss your unique situation.
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