Bankruptcy is a legal process, often seen as a last resort for individuals or businesses, that reduces or eliminates the obligation to repay certain debts and offers a fresh start. But this can be confusing because different chapters of the file bankruptcy code can be applied, depending on whether the debtor is an individual or a business and other factors. So, you shouldn’t feel bad if you don’t know the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy, two options that apply to consumers.
There are actually six types of bankruptcy: Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15. But chances are, if you are reading this, you are going to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy.
What is the difference between chapters 7 and 13?
âThe two most common types of consumer bankruptcy are Chapter 7 and Chapter 13. While a Chapter 7 is commonly referred to as a liquidation, in reality most, if not all of the assets are protected,â says Matthew Zimmelman, specialist lawyer in bankruptcies in Valley. Creek, New York.
âA Chapter 13 works differently in that you create a three to five year reorganization plan to pay off your debt,â Zimmelman explains. âMortgage arrears, taxes and household support obligations are paid in full in the plan while credit cards, personal loans and medical bills can be paid on a pro rata basis – at a percentage – based on the disposable income of the housework. ”
Most individuals tend to file for Chapter 7; most companies go for Chapter 13. But not always. Some business owners go for Chapter 7, and some owners end up filing for Chapter 13 bankruptcy.
Below we’ll break down the differences a bit more:
Eligibility criteria. Typically, with Chapter 7, your income should be below your state’s median income level, or you may need to take a means test to determine if you can repay your debts. In other words, if you are rich enough, the courts are unlikely to approve your bankruptcy. If you are truly excluded, you are likely to end up with Chapter 7 bankruptcy.
During this time, everyone is eligible for Chapter 13, as long as your unsecured debt is less than $ 394,725 and secured debt is less than $ 1,184,200. (These numbers are for 2021; they change with the Consumer Price Index.)
Discharge rate. This is a term used to describe the completion or success rate of a bankruptcy. In 2020, there were 378,953 Chapter 7 filings and 156,377 Chapter 13 filings in the United States. These numbers were considerably lower than in previous years, which goes against what you would expect during the COVID-19 pandemic. That said, companies filing Chapter 11 were significantly higher than in previous years.
Goods. With a Chapter 7 bankruptcy, you may need to sell some property that you own. With a chapter 13, you won’t. But before you panic, most states have bankruptcy exemptions that allow individuals to keep their homes and cars in Chapter 7 bankruptcy. That said, it should help your case if you don’t. miss your mortgage payments; if you are very late, you risk ending up in Chapter 13 bankruptcy instead. Obviously, if you are really in trouble, it is best to consult a bankruptcy lawyer.
Benefits of Chapter 7 or Chapter 13 bankruptcy. You can get a fresh start on many of your debts. However, you usually won’t have all of your debts canceled. Student loans and taxes are hard to wipe from your ledger in bankruptcy, for example. If you owe child support, bankruptcy won’t change that. But many debts, like credit card debts and hospital bills, will be paid off permanently.
Disadvantages of Chapter 7 or Chapter 13 bankruptcy. Expect your credit rating be strangled. Having said that, you never know. Chances are, if you are headed for bankruptcy, your score may already have exploded. Anecdotally, some lenders have loaned money to individuals after bankruptcy. Why? Because the lender knows that you don’t owe a lot of money anymore and you can probably make regular payments again.
Chapter 7 Bankruptcy
How it works. Going through the bankruptcy process isn’t difficult, according to Dai Rosenblum, a lawyer and legal counsel in Butler, Pa.
âIt is really simple to file a new Chapter 7 bankruptcy,â Rosenblum said. “You find a competent bankruptcy lawyer, you pay their fees, you fill out a questionnaire, you verify that your documents are complete and correct, you have a five-minute meeting with the creditors, you wait about two months to get a piece of paper in the mail that clears all your debts. That’s all. All of my clients say the same thing: ‘I can’t believe how easy it was. I wish I had done this a long time ago. ‘”
How do I know if I qualify for Chapter 7 bankruptcy? As noted, you’ll likely take a means test to determine that you really need to file for bankruptcy, and the rules for who can qualify are different in each state. Consult a bankruptcy lawyer is the best way to go.
Can I Lose Property in Chapter 7 Bankruptcy? Yes. Again, everyone’s situation is different. But many people are able to keep their property in Chapter 7 bankruptcy, especially if it is their primary residence. It often depends on what state you live in.
Chapter 13 Bankruptcy
How it works. According to Rosenblum, “Chapter 7 is always preferred over Chapter 13. You drop Chapter 13 because you have to, not because you want to.”
You and a lawyer – and the courts or the circumstances – will decide what to file.
But generally, Rosenblum says, you’ll file Chapter 13 if you’re behind on your mortgage, or if you exceed your state’s median income and don’t qualify for a Chapter 7. He says you can also end up filing. for Chapter 13 if you have too much equity in an asset, like a house or business, and want to pay your creditors yourself over time rather than risk losing your asset to a trustee of Chapter 7 to liquidate it.
How much of my debt will I have to repay if I file for Chapter 13 bankruptcy? It’s impossible to say. It depends on how much debt you owe and the courts must approve your repayment plan. So, no, a bankruptcy court probably won’t approve of you paying $ 10 on a $ 10,000 loan.
Having said that, you will feel some relief when you drop. “A 13th chapter is not as good as a 7 chapter, but 13th chapters are wonderful,” says Rosenblum.
He adds that you are guaranteed a zero percent interest rate on any unsecured debt you repay.
How long will my repayment plan last if I file for Chapter 13 bankruptcy? Three to five years, depending on the amount of debt and how quickly you want to pay it off.
Can I Keep My Home With Chapter 13 Bankruptcy Under Foreclosure? Yes, it is certainly possible. This is because when you file a Chapter 13 application, you get what is called an automatic stay.
“The automatic stay puts a stop to all activity by creditors,” Rosenblum said, adding that it even stops the IRS.
He adds: âIf a creditor has recently seized an asset, such as a vehicle or a bank account, he must return it. There are exceptions. In law, there are always exceptions and often exceptions to exceptions. the essential.”
So if you get a foreclosure notice, a Chapter 13 will essentially freeze your time from a financial standpoint, and it could allow you to make a plan to pay your mortgage lender so you can catch up on late payments.
Can I use my retirement to fund a Chapter 13 repayment plan? You might want to, but is it really a good idea? This does not appear to be the case, as you would create a future problem in which you will one day have less money for your retirement. In all cases, you will need to get permission from the bankruptcy court.
Can Chapter 13 Bankruptcy Help Me Pay Off the IRS? You can use a Chapter 13 bankruptcy to help you repay the IRS, but if it’s your only creditor, you may want to discuss a repayment plan without declaring bankruptcy. You can also attempt an offer in compromise, which can allow a taxpayer to settle his tax debt for less than the full amount he owes.
Which one should I use: Chapter 7 or Chapter 13 bankruptcy?
There is no way to find out without talking to a lawyer first. What is good for some people may not be good for you.
That said, most people go for Chapter 7, according to Carlo Sabatini, bankruptcy lawyer and managing partner at Sabatini Freeman LLC in Dunmore, Pa.
Generally speaking, Sabatini says, âChapter 7 is cheaper than Chapter 13 and much faster. A Chapter 7 is usually completed in about four months. A Chapter 13 takes at least three years. But for some consumers, Chapter 13 offers some relief that is not available in Chapter 7. ”
For example, he says some owners use Chapter 13 to salvage a vehicle that has been recently repossessed or to completely write off some second mortgages.
Bottom line: If you have a choice, you pick the path – Chapter 7 or Chapter 13 – that’s right for you. And with any luck, bankruptcy will allow you to write a new and better chapter in your financial life.