Posted on May 1st, 2023.

Are you struggling with debt and wondering whether bankruptcy is the right choice for you? As an attorney specializing in bankruptcy law, I often encounter clients who are confused about the difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy.

In this blog post, we'll explore the key differences between these two types of bankruptcy and help you decide which one might be right for you.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as "liquidation" bankruptcy, is the most common form of bankruptcy in the United States. It is typically used by individuals who have little to no disposable income and cannot repay their debts.

Explanation

In Chapter 7 bankruptcy, a trustee is appointed to sell the debtor's non-exempt assets and use the proceeds to repay creditors. Most unsecured debts are discharged in Chapter 7 bankruptcy, meaning that the debtor is no longer obligated to pay them.

Eligibility

Not everyone is eligible for Chapter 7 bankruptcy. In order to qualify, you must pass the "means test," which compares your income to the median income in your state. If your income is below the median, you are eligible for Chapter 7 bankruptcy. If your income is above the median, you may still be eligible if you can demonstrate that you have significant expenses or debts.

Advantages

One of the main advantages of Chapter 7 bankruptcy is that it allows you to discharge most unsecured debts, such as credit card debt and medical bills. This can provide a fresh start and relieve the burden of overwhelming debt. Chapter 7 bankruptcy also typically takes less time than Chapter 13 bankruptcy, with most cases being discharged within four to six months.

Disadvantages

However, there are also some disadvantages to Chapter 7 bankruptcy. One of the biggest drawbacks is that the trustee will sell your non-exempt assets to repay creditors. This can include items like a second car or a vacation home. Additionally, Chapter 7 bankruptcy will remain on your credit report for 10 years, which can make it difficult to obtain credit in the future.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, on the other hand, is a form of "reorganization" bankruptcy. It is typically used by individuals who have a steady income and can afford to repay their debts over time.

Process

In Chapter 13 bankruptcy, the debtor enters into a repayment plan that lasts between three and five years. During this time, the debtor makes monthly payments to a trustee, who then distributes the funds to creditors. At the end of the repayment period, any remaining unsecured debts are discharged.

Repayment Plan

The repayment plan in Chapter 13 bankruptcy is based on your income and expenses, and typically lasts between three and five years. During this time, you make monthly payments to the trustee, who then distributes the funds to creditors.

Advantages 

One of the main advantages of Chapter 13 bankruptcy is that it allows you to keep your assets while still repaying your debts. The repayment plan can also help you catch up on missed mortgage or car payments, and can help you avoid foreclosure or repossession.

Disadvantages

However, there are also some disadvantages to Chapter 13 bankruptcy. One of the biggest disadvantages is that the repayment plan can last for several years, which can be a significant commitment. Additionally, the bankruptcy will remain on your credit report for seven years, which can make it difficult to obtain credit in the future.

How to Choose Between Chapter 7 and Chapter 13 Bankruptcy

Choosing between Chapter 7 and Chapter 13 bankruptcy can be a complex decision. It's important to consult with an experienced bankruptcy attorney who can help you understand the pros and cons of each option and determine which one is right for you. Here are some key differences between Chapter 7 and Chapter 13 bankruptcy:

• Eligibility: Not everyone is eligible for Chapter 7 bankruptcy, as there are income limits and other requirements that must be met. Chapter 13 bankruptcy is available to those with a steady income.
• Asset liquidation: In Chapter 7 bankruptcy, the trustee will sell the debtor's non-exempt assets to repay creditors. In Chapter 13 bankruptcy, the debtor keeps their assets and repays debts over time.
• Debt discharge: Chapter 7 bankruptcy discharges most unsecured debts, while Chapter 13 bankruptcy discharges remaining unsecured debts at the end of the repayment period.
• Time frame: Chapter 7 bankruptcy typically takes four to six months to complete, while Chapter 13 bankruptcy can take three to five years.

Examples

1. Let's say that you have $30,000 in credit card debt, $10,000 in medical bills, and $20,000 in personal loans, but you have no assets beyond your household goods and personal belongings. You file for Chapter 7 bankruptcy, and the trustee sells your household goods and personal belongings for $5,000. The $5,000 is used to pay off some of your debts, and the remaining unsecured debts are discharged.

2.Let's say that you have $50,000 in credit card debt, $20,000 in medical bills, and $30,000 in personal loans, but you have a steady income of $5,000 per month.

You file for Chapter 13 bankruptcy, and the trustee creates a repayment plan that requires you to pay $1,000 per month for five years. The trustee distributes the $1,000 payments to your creditors each month, and at the end of the five-year repayment period, any remaining unsecured debts are discharged.

An experienced bankruptcy attorney can help you evaluate these factors and determine which option is best for your unique situation.

Contact Sidney Mickell, Esq for Bankruptcy Advice

If you're struggling with debt and considering bankruptcy, don't hesitate to reach out to Sidney Mickell, Esq for help. Our experienced bankruptcy attorneys can help you understand your options and guide you through the process of filing for bankruptcy. Contact us today at 3233091137 or [email protected] to schedule a consultation.

By understanding the key differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy, you can make an informed decision about which option is right for you. Whether you need a fresh start through Chapter 7 bankruptcy or a repayment plan through Chapter 13 bankruptcy, Sidney Mickell, Esq can provide the guidance and support you need to achieve financial stability.