Filing bankruptcy is probably not your idea of a good time. However, you should take solace in the fact that 800,000 people filed in 2016--and that is a low number compared to previous years!
While this number proves you're not alone in the matter, it's important to know exactly what you're filing for. There are two main types of bankruptcy that can be filed and have separate rules.
We're going to take a look at the difference between chapter 7 and chapter 13 bankruptcies allowing you to see what fits your needs better! Keep reading for more information!
Types of Bankruptcies
It's important to know why this article will only discuss the difference between chapter 7 and chapter 13 filings. There are actually five types of bankruptcies possible. However, chapter 7 and chapter 13 are the ones that apply to most individual situations.
There are some similarities between chapter 11 and chapter 13 in that both types of filings are ways to restructure debt.
What is Chapter 7 Bankruptcy?
Simply put, chapter 7 is liquidation bankruptcy. It is the most common form of filing and is a simple and inexpensive option to rid yourself of debt.
Once you file for chapter 7, all assets are sold and the funds raised will be distributed to creditors. After the sales are settled and as many debts as possible paid, a discharge will occur.
A discharge is a fancy way of saying that creditors can't pursue collections anymore. If attempts are made to collect, the creditor can be punished by the court system.
After assets are sold and debtors repaid, you're in the clear... right?
Not quite. Some debts aren't dischargeable. These non-dischargeable debts can include:
- Items not listed on your bankruptcy paperwork: sometimes it's a matter of forgetfulness and other times it may be intentional.
- Support payments: filing bankruptcy won't discharge debts like child support or alimony
- Debts incurred for personal injury or death while intoxicated
- Most student loans: if there is proof that repayment would place undue hardship, these loans may qualify for discharge
- Legal fines: this includes traffic tickets and court costs for breaking the law
- Taxes: any taxes owed at a local, state, or federal level will not be discharged. Money borrowed from credit cards to pay these taxes will also not be discharged
- Debt that wasn't discharged in a bankruptcy that was dismissed due to fraud
What is Chapter 13 Bankruptcy?
Filing for chapter 13 bankruptcy is intended for those that would like to pay off their debts but cannot do so currently. When chapter 13 is filed, the debtor and his attorney propose a repayment plan to creditors.
Debts can be paid in part over the proposed time frame and any remaining amount may be discharged at the end of the period. People that are eligible to file for chapter 13 must have unsecured debts amounting to less than $394,725.
The limit for secured debts is higher, with the maximum amount being $1,184,200. These amounts are changed from time to time according to the Consumer Price Index.
Chapter 13 is available to individuals as well as those that are self-employed or operating an unincorporated company.
As with chapter 7, most creditors cannot continue collections attempts. It should also be noted that when choosing chapter 13 bankruptcy, creditors cannot pursue collections from co-debtors.
The Difference Between Chapter 7 and Chapter 13
Many low-income individuals opt to file for chapter 7 because of the fact it is low cost and after doing so, debts are discharged. Even if the person filing isn't considered low-income, it may be a great option for people without co-debtors.
After filing and liquidation of assets, creditors will be paid and most debt is discharged. If you have co-debtors, you may take them into consideration because creditors can and will attempt collections from them.
Chapter 7 is a quick filing with proceedings only taking 3-6 months. This type of bankruptcy also has no limitations on how much or little your debts can be.
Chapter 13 bankruptcy can take a little longer to file and process. Although there are limitations on how much debt is allowed, if you don't exceed this number, keeping your assets is an option.
Another key difference is the fact that a chapter 7 bankruptcy can be on your credit report for up to 10 years. A chapter 13 filing can be listed for as few as 7.
If you are concerned about the effect a bankruptcy will have on your credit, chapter 13 is typically favored. This is because you end up paying back a majority of debts.
However, if you are mainly trying to get relief from the burden of debt and collections calls, chapter 7 may be the right choice for you.
A Few Similarities
While there are several differences between chapter 7 and chapter 13 bankruptcies, there are also a few similarities.
Probably the biggest way these two are similar is the fear that comes with them. No one wants to file for any type of bankruptcy, but sometimes it is necessary.
Once you file, your credit will suffer--there is no doubt about this. When you take the steps to file and begin clearing your debt, you will see results down the road. You'll also get a sense of relief knowing that you can start over.
Credit cards are another commonality between bankruptcies. Oftentimes, people get into severe debt by over swiping of cards. It'll take some time, but after a while, you will be able to open lines of credit again.
Making a Smart Choice
Deciding to file for bankruptcy is a difficult choice. You aren't a failure, you haven't let anyone down, and you're not less of a person.
However, it is important that you consider all options and make the best choice for you (and your family.)
This is where knowing the difference between chapter 7 and chapter 13 bankruptcy comes in. It's also where finding a trustworthy attorney will be helpful.
Consulting with a bankruptcy attorney will help you make the best choice for your finances as well as aid in the filing of paperwork. If you're thinking of filing bankruptcy, contact us today!