There are multiple kinds of bankruptcy, and each offers different benefits and has different requirements. When individuals need to file, they often find themselves choosing between Chapter 7 and Chapter 13 bankruptcy.
While both of these kinds of personal bankruptcy will protect you with an automatic stay and lead to the discharge of your unsecured debt after a successful filing, they also have significant differences.
What are some of the biggest distinctions between a Chapter 13 bankruptcy and a Chapter 7 filing?
There are stricter income limits for Chapter 7 bankruptcy
Chapter 7 bankruptcy is a fast and streamlined way for an individual without enough income to repay their debts to discharge some of what they owe. Those who want to file Chapter 7 bankruptcy have to pass a means test they have to adjust their annual income and compare it with the state median for their household size.
Only those who fall below the state median after adjusting their income can file for Chapter 7. That makes it a great option for those with limited or no income, while Chapter 13 is a good solution for those with higher income levels.
Chapter 7 bankruptcy requires the liquidation of assets
To qualify for the discharge of your unsecured debts in a Chapter 7 filing, you will have to provide the courts with a statement about your income and assets. The courts may demand that you sell off or refinance some of your property to repay your creditors before your discharge.
These liquidation requirements can make Chapter 13 bankruptcy a better option for those with substantial personal property. Instead of selling some of their assets to repay their debt, they will have to make payments for several years but can retain all of their personal property in the process.
Chapter 7 bankruptcy stays on your credit report for longer
When the courts approve your bankruptcy and grant you a discharge of your remaining unsecured debts, your bankruptcy filing will remain on your credit report for years. Your discharge will be on your record for longer after it occurs in a Chapter 7 filing than a Chapter 13 filing.
It will stay on your credit report for ten years after Chapter 7 bankruptcy but just seven years after a Chapter 13 bankruptcy. That gap evens out a little when you factor in the repayment plan that usually lasts between three and five years in a Chapter 13 filing.
Learning about the different kinds of bankruptcy can help you decide how to protect yourself when your debt spirals out of control.