Bankruptcies: Chapter 7 Versus Chapter 13
When you face overwhelming debt that you cannot pay, bankruptcy can give you a fresh financial start. You can choose between Chapter 7 and Chapter 13 generally, but which is right for you? Here are four major differences between these types of bankruptcies.
1. How They Work
Chapter 7, also called a straight or liquidation bankruptcy, is a discharge procedure. The bankruptcy trustee oversees the sale of your nonexempt assets to pay your creditors to the greatest extent possible and the court then discharges your remaining consumer debts, including your credit card debts.
Chapter 13 is a reorganization procedure. You divide your creditors into three categories: priority, secured and unsecured. You have the opportunity to meet individually with each priority and secured creditor in an attempt to renegotiate that debt. Often this achieves a principal reduction or an interest rate reduction. You meet with your unsecured creditors as a group. Once all the meetings conclude, you and your attorney draft a repayment plan, likely with help from the bankruptcy trustee. This is in order to pay off or substantially reduce the amounts of your debts with monthly payments over the course of the bankruptcy period. After the court approves your plan, you then follow it. At the end of your bankruptcy period, the court discharges any unsecured debts not mentioned in your plan.
2. How Long They Take
Chapter 7 usually takes from two to six months. Most Chapter 13 bankruptcies take three years, but the court can extend this to five years if necessary. If you are seeking guidance from a Chapter 13 bankruptcy lawyer, you could consider lawyers from a firm like Pioletti Pioletti & Nichols to help with any bankruptcy questions you may have.
3. How You Qualify
You must pass a means test to qualify for Chapter 7. Each state has its own guidelines. Basically, you add up all your income sources, deduct your allowable expenses and compare your net income to your state’s median income for a household of your size. If your net income falls at or below the median, you qualify.
While Chapter 7 qualifications are all about the amount of your income, Chapter 13 qualifications are all about the amount of your debt. To qualify for Chapter 13 you must have no more than $419,275 in unsecured debt and no more than $1,257,850 in secured debt.
Chapter 7 only delays foreclosure; it doesn’t stop it. Once the automatic stay period expires, your mortgage lender can restart foreclosure proceedings. Chapter 13, on the other hand, can save your home from foreclosure. As long as you keep making the monthly payments called for in your repayment plan and have caught up all your currently overdue payments by the end of your bankruptcy period, your home is safe from foreclosure.