Legal Guide

How is Chapter 7 Bankruptcy Different From Chapter 13 Bankruptcy?

It is essential to know the difference between chapter 7 and chapter 13 bankruptcy before making any decisions about your financial future. Make sure you speak with an experienced attorney from the Law Offices of Scott J. Goldstein, who can help you assess your eligibility and provide personalized advice based on your unique situation.

Bankruptcy is a complex process; let us go through the differences between Chapter 7 and Chapter 13 before deciding which type of bankruptcy to file. 

Major distinctive factors between chapter 7 and chapter 13 bankruptcy. 

  • Assets 

For Chapter 7 filings, most non-exempt assets must be liquidated in order to pay off creditors. This could include real estate, cars, and other possessions not protected by certain exemptions. For Chapter 13 filings, individuals are usually allowed to keep most assets while making monthly payments over the course of three or five years toward paying off their debt.

  • Eligibility 

In order to qualify for Chapter 7 bankruptcy, individuals must meet specific financial criteria such as income limits and debt-to-income ratios. Chapter 13 bankruptcy is open to anyone who can prove that they have a regular source of income and are able to make payments on their debt.

For Chapter 7 bankruptcies, the individual must have a limited income and pass a “means test” to prove they do not have the financial ability to pay creditors. Generally speaking, if an individual’s disposable income after accounting for reasonable living expenses is insufficient to repay debt, they qualify for Chapter 7.

For Chapter 13 bankruptcies, the individual must prove they have a steady income source that will enable them to make regular payments over the course of three to five years in order for their debts to be discharged. Typically, no maximum amount of debt is required, but it must be within federal limits set by each state.

  • Timeline 

The timeline for Chapter 7 bankruptcy is relatively short since no repayment plan is required – after filing, most debts will be discharged within four months. On the other hand, Chapter 13 requires at least three years of payments in order for debts to be discharged.

  • Debt Limits 

Depending on your state, certain thresholds may be in place limiting the amount of debt that can qualify for either chapter of bankruptcy. Typically, these apply more so to unsecured debts like credit cards or medical bills rather than secured loans such as mortgages or car loans.

It is vital to speak to an experienced bankruptcy attorney who can provide you with a detailed comparison and assist you. 

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