If you're facing financial difficulties, you may be wondering about the differences between Chapter 7 and Chapter 13 bankruptcy. It can be challenging to understand the nuances of each, but don't worry - we're here to help.
Before you decide which chapter of bankruptcy to file, there are a few things you need to consider. For example, you may want to file under Chapter 7, but you might not be eligible for a Chapter 7 bankruptcy discharge. Alternatively, you may prefer Chapter 13 bankruptcy to protect your property from being sold off, but you may not have the steady income needed to fund a Chapter 13 repayment plan.
Don't worry if you're feeling overwhelmed. We've got you covered with a free Chapter 7 vs Chapter 13 calculator. This tool will help you estimate your Chapter 7 qualification, understand the costs of each option, and see the pros and cons of each based on your specific situation, income, and expenses.
And if you're a reader, we've got some great articles we'd like to recommend:
- Can I still qualify for Chapter 7 if I make over the allowable income in my state?
- Why You Have to Compare Chapter 13 to Debt Negotiation if You Don’t quality for Chapter 7
- Why do Some People Question Whether Chapter 13 is Worth It?
Now, let's get back to the main topic. When choosing between Chapter 7 and Chapter 13, there are several things you need to consider. Let's take a look at some of the most important factors.
Do You Qualify to File Under Chapter 7 or Chapter 13?
Deciding on the type of bankruptcy to file can be challenging. If you're considering Chapter 7, it's essential to note that you may not qualify for a bankruptcy discharge. On the other hand, Chapter 13 bankruptcy may be a better option if you want to protect your property from being sold off. However, you must have a stable income to fund the Chapter 13 repayment plan.
When filing for bankruptcy, the ultimate goal is to obtain a discharge, which eliminates your legal obligation to repay a debt. While certain debts cannot be discharged in bankruptcy, most unsecured debts are eligible for a discharge. For more information on bankruptcy discharges, you can refer to the Department of Justice's Bankruptcy Information Sheet.
Qualifying to File Under Chapter 7
If you're struggling to pay off your debts, Chapter 7 bankruptcy relief might be an option for you. But before you can qualify for a bankruptcy discharge under Chapter 7, you need to meet certain income requirements. The court uses a form called the Means Test to determine your eligibility for a discharge under Chapter 7.
To get an idea of whether you might qualify for Chapter 7 bankruptcy relief in your state, you can use our bankruptcy means test calculator. This tool can help you estimate your eligibility for Chapter 7 vs Chapter 13 bankruptcy relief.
The Means Test
When considering filing for Chapter 7 bankruptcy, one important factor to consider is the Means Test. This test compares your average income to the average income of similar households in your state. If your average income is higher than the median income for your state, you may not be eligible for Chapter 7. However, there are some exceptions to this rule, and you may still qualify for Chapter 7 even if your income is above the median level.
In addition to examining your average income, the Means Test also looks at your disposable income. This is the money you have left over each month after paying for certain living expenses. If your disposable income falls below a certain level, you may still be able to file for Chapter 7 bankruptcy.
Qualifying to File Under Chapter 13
If you're struggling with debt, filing for Chapter 13 bankruptcy may be an option for you. This type of bankruptcy, often called a "wage earners" bankruptcy, requires you to have a steady income to fund a court-approved reorganization plan. This plan will reorganize your debts into an affordable monthly repayment plan, which you'll follow for either 36 or 60 months, depending on your eligibility. To estimate your monthly payment, you can use our Chapter 13 calculator below.
It's important to note that to be successful in Chapter 13, you need to have a steady income that's enough to cover your Chapter 13 payments, living expenses, and any debts not included in your plan. This may include regular mortgage payments and ongoing domestic support obligations, such as alimony and child support.
The good news is that there are various types of income that may qualify, including wages, salaries, commissions, self-employment income, retirement, pension, disability, or Social Security benefits. The key is that your income is steady and sufficient to meet your financial obligations.
Are You In Danger of Losing Assets if You File Chapter 7?
If you're considering filing for Chapter 7 bankruptcy, it's important to understand that all of your assets will become part of your bankruptcy estate. This means that a trustee will review your assets to determine if any of them can be sold to repay your unsecured creditors. However, not all assets will be sold. Only those that have equity above valid liens and bankruptcy exemptions will be at risk.
While this may sound daunting, it's important to note that bankruptcy exemptions can protect many of your assets. These exemptions vary by state, but they typically include things like your home, car, and personal property. Additionally, even if an asset is at risk of being sold, it doesn't necessarily mean that it will be. The trustee will consider a variety of factors before deciding whether or not to sell an asset, including the cost of selling it and the amount of money that would be generated from the sale.
Overall, filing for Chapter 7 bankruptcy can be a challenging process, but it can also provide relief from overwhelming debt. By understanding the potential risks and benefits, you can make an informed decision about whether or not it's the right choice for you.
Bankruptcy Exemptions
When you file for bankruptcy, you may be able to protect some of the equity in your assets through bankruptcy exemptions. These exemptions determine the amount of equity you can keep if your property is sold by the Chapter 7 trustee. After analyzing your property, the trustee determines whether there is any money left over from the bankruptcy estate after satisfying liens, sale costs, and your exemption amount. If there is little to no money remaining in the bankruptcy estate, you get to keep the property.
There are two types of bankruptcy exemptions: federal and state. Depending on where you live, you may be required to use one or the other. State bankruptcy exemptions vary, so it's important to check the bankruptcy homestead exemptions for your state before filing Chapter 7.
It's crucial to review the bankruptcy exemptions available in your state before filing for Chapter 7. Doing so will help you assess the risk of losing your property. If your assets are at risk, you might want to consider filing for Chapter 13. In Chapter 13, you can protect assets with equity above the allowed exemptions by paying a little extra each month through your repayment plan.
It's worth noting that bankruptcy exemptions can change, so it's essential to review the most current information available for your state before choosing between Chapter 7 and Chapter 13. NOLO has a list of states that allow for federal bankruptcy exemptions, but it's always best to stay up-to-date on the latest information.
Pros and Cons of Filing Under Chapter 7 versus Chapter 13
Deciding to file for bankruptcy can be a tough decision, and there are different options available. Each option has its own advantages and disadvantages. For example, you can file for Chapter 7 or Chapter 13 bankruptcy. Here are some things to consider:
- Chapter 7 bankruptcy is a quicker process that can eliminate most debts, but you may have to give up some of your assets.
- Chapter 13 bankruptcy allows you to keep your assets and pay off your debts over time, but the process can take several years.
It's important to weigh the pros and cons of each option and consult with a bankruptcy attorney to determine the best course of action for your specific situation.
Chapter 7 Pros / Chapter 13 Cons
If you're considering filing for bankruptcy, it's important to understand the differences between Chapter 7 and Chapter 13. Chapter 7 cases are generally completed faster, typically within four to six months of filing the bankruptcy petition. In contrast, a Chapter 13 case can take over five years to complete. Another benefit of Chapter 7 is that it's usually less expensive. The attorneys' and filing fees are typically lower than the fees for filing under Chapter 13. In a Chapter 7 case, eligible unsecured debts are discharged, meaning you don't have to repay them. However, in Chapter 13, you must pay a certain percentage of your unsecured debt. This amount is based on factors such as your disposable income, the amount of debt owed, and the value of non-exempt property. It's important to weigh the benefits and challenges of each option before making a decision.
Chapter 7 Cons / Chapter 13 Pros
Bankruptcy is a challenging decision to make, and it is crucial to understand the differences between Chapter 7 and Chapter 13. Under Chapter 7, you may lose your property, including your home and vehicles, if they have significant equity. Unfortunately, bankruptcy exemptions may not protect that equity. However, Chapter 13 can provide a solution by safeguarding assets with non-exempt equity from the court and creditors. It is important to note that a Chapter 7 bankruptcy case can remain on your credit report for up to ten years. In contrast, a Chapter 13 bankruptcy case falls off your credit report after seven years. Moreover, if you file under Chapter 13 instead of Chapter 7, you may qualify for a home mortgage faster. If you are behind on your loan payments, filing Chapter 7 typically does not save your home or car.
However, through a Chapter 13 case, you can catch up on mortgage payments to prevent foreclosure and pay your car loan through your bankruptcy plan. Additionally, Chapter 13 can help with back alimony and child support payments. Domestic support arrears can be included in a repayment plan, provided you make all future alimony and child support payments on time. It is worth noting that a Chapter 7 case does not eliminate most tax debt. The taxing authority may resume collection efforts after the Chapter 7 case closes, including wage garnishments and levies. However, tax debt can be included in a Chapter 13 plan. In conclusion, choosing between Chapter 7 and Chapter 13 can be challenging, and it is essential to understand the benefits and challenges of each option. Seeking professional advice can help you make an informed decision and start rebuilding your financial future.
Are You Ready to Compare Chapter 7 and Chapter 13 in More Detail?
By analyzing your financial situation, we can determine if you qualify for Chapter 7 or if Chapter 13 might be a better fit for your needs.
Curious to see which option is right for you? Try our Ch7 vs Ch13 Calculator and get started on the path to financial freedom today.