Chapter 13 Bankruptcy

Chapter 13 and Chapter 7 bankruptcy are two different types of bankruptcy relief available to individuals under U.S. federal law. Here’s a detailed explanation of how Chapter 13 bankruptcy works and the differences between Chapter 13 and Chapter 7, including the qualifications for each.

Chapter 13 Bankruptcy

How It Works:

1. Repayment Plan: Chapter 13 bankruptcy involves a repayment plan to pay back all or part of your debts over a period of three to five years. The plan is based on your income, expenses, and the type of debt you owe.
2. Trustee Appointment: A bankruptcy trustee is appointed to oversee the case. This trustee will collect payments from you and distribute them to your creditors according to the terms of the repayment plan.
3. Court Approval: The repayment plan must be approved by the bankruptcy court. Creditors may object to the plan, but the court has the final say.
4. Discharge: After you complete the repayment plan, any remaining eligible debt is discharged, meaning you are no longer legally required to pay it.

Who Qualifies for Chapter 13:

1. Regular Income: You must have a regular income to qualify, as you need to make monthly payments to the trustee.
2. Debt Limits: As of the latest updates, your secured debts (like mortgages and car loans) must be less than $1,257,850 and your unsecured debts (like credit card debt and medical bills) must be less than $419,275.
3. Current on Tax Filings: You must be current on your tax filings for the past four years.
4. No Recent Bankruptcy Discharge: You cannot file for Chapter 13 if a prior bankruptcy discharge was received within a certain period (four years for Chapter 7 and two years for Chapter 13).

Chapter 7 Bankruptcy

How It Works:

1. Liquidation: Chapter 7 is often called “liquidation bankruptcy” because it involves selling (liquidating) non-exempt assets to pay creditors. However, many personal assets are exempt, meaning they can’t be sold.
2. Trustee Role: A trustee is appointed to oversee the liquidation of non-exempt assets and distribute the proceeds to creditors.
3. Discharge: Most of your unsecured debts are discharged, meaning you are no longer required to pay them. This process typically takes a few months.

Who Qualifies for Chapter 7:

1. Means Test: You must pass a means test, which compares your income to the median income for a household of your size in your state. If your income is below the median, you automatically qualify. If it’s above, further calculations are done to determine if you have enough disposable income to repay some of your debts.
2. Credit Counseling: You must complete a credit counseling course from an approved provider within 180 days before filing.
3. No Recent Bankruptcy Discharge: You cannot file for Chapter 7 if you received a Chapter 7 discharge within the past eight years or a Chapter 13 discharge within the past six years.

Key Differences Between Chapter 13 and Chapter 7

• Repayment vs. Liquidation: Chapter 13 involves repaying debts over time, while Chapter 7 involves liquidating assets to pay debts.
• Income Requirements: Chapter 13 requires a regular income, whereas Chapter 7 requires passing a means test.
• Debt Limits: Chapter 13 has specific debt limits, but Chapter 7 does not.
• Duration: Chapter 13 plans last three to five years, whereas Chapter 7 can be completed in a few months.
• Asset Protection: Chapter 13 can protect non-exempt assets that might be sold in Chapter 7.

How to Choose Between Chapter 13 and Chapter 7 Bankruptcy 

Choosing between Chapter 13 and Chapter 7 depends on your specific financial situation, income, types of debts, and long-term financial goals. Consulting with a bankruptcy attorney can help you understand which option is best for your circumstances.