How Does Chapter 13 Bankruptcy Differ from Chapter 7?
When the founding fathers wrote the US constitution, they did so to help the citizens of their young nation thrive and flourish—both at present and for future generations. It is with this spirit that a bankruptcy clause was written into the constitution, enabling those who struck financial struggle to get their lives back on track.
When an individual files for bankruptcy, a court examines all the financial assets and debts of that person and determines if those debts should be discharged, meaning there is no longer an obligation to pay those creditors. But there are multiple forms of bankruptcy that can take place, each designed for specific financial situations and needs. Before diving into the decision to file for bankruptcy head on, it’s important to understand how the most common personal bankruptcy cases—Chapter 13 and Chapter 7—differ.
Chapter 7 Bankruptcy Basics
Chapter 7 bankruptcy refers to the total liquidation and elimination of debt, and is generally what people think of when they hear talk of bankruptcy. There are specific qualifications that an individual needs to meet to qualify and the process is quite rigorous, but the vast majority of people who apply are granted debt forgiveness to some extent. The qualifications necessary are primarily in relation to income, as those who apply must be below a median income point for their state. With Chapter 7 cases, it is also possible for non-exempt assets to be seized as a way to pay back creditors. While this is the law, it rarely pans out this way as the majority of people applying for bankruptcy don’t have assets with enough monetary value to justify confiscating them.
Chapter 13 Bankruptcy Basics
Chapter 13 bankruptcy on the other hand is not a total elimination of debt, but a reorganization of it. While some money owed to creditors may be forgiven entirely with this type of bankruptcy, the primary goal is to arrange the debt and payments made to creditors in a way that is more manageable for the specific individual and their financial situation. During the case, a repayment plan is proposed for the court’s approval and—if approved—payments are made to creditors generally over a 3 – 5-year period. There are a couple of qualifications that a proposed plan must meet for Chapter 13 eligibility. Firstly, the best-interest test ensures that creditors receive at least as much as they would with a Chapter 7 case. There’s also the best-efforts test, which mandates that all disposable income after basic living expenses will be given to the creditor for at least 3 years.
What’s Right for You?
While both types of bankruptcy have their downfalls, they also have their perks. With Chapter 7, all—if not the vast majority—of debt is liquidated. With Chapter 13 cases, the individual’s property and other assets are not available to be seized. There are other categories of bankruptcy as well, but these two make up the most prominent among personal bankruptcy cases. Be intentional and thoughtful when deciding which type of bankruptcy fits your financial needs and situation before you file.
Of course, it’s better to manage finances in a way that you never have to consider bankruptcy at all. But life throws curveballs and people face challenges, and—through that adversity—there are systems in place—like Chapter 7 and 13 bankruptcy options—that can get you back on your feet and on with your life.