Bankruptcy is a legal process that helps people and businesses overcome overwhelming financial challenges. Among the various bankruptcy chapters, Chapter 7 and Chapter 13 are two distinct paths individuals may choose based on their financial circumstances.
Understanding the key differences between these chapters is necessary for anyone considering bankruptcy as a means of debt relief.
Chapter 7 bankruptcy
Chapter 7 bankruptcy involves the sale of the debtor’s non-exempt assets to pay off creditors. This process is generally quicker, typically taking a few months to complete. A key aspect of Chapter 7 is the discharge of most unsecured debts, providing people with a fresh start. However, not everyone qualifies for Chapter 7. Instead, eligibility hinges on means testing, which evaluates the debtor’s income compared to the median income in his or her state.
Chapter 13 Bankruptcy
In contrast, Chapter 13 bankruptcy focuses on reorganizing and repaying debts over a specified period. The period usually spans three to five years. Instead of liquidating assets, those filing for Chapter 13 create a repayment plan, consolidating debts and making monthly payments to a trustee. This plan allows debtors to catch up on missed payments while retaining their assets. Chapter 13 is often suitable for individuals with a regular income who want to protect their property. It is also an option for those do not qualify for Chapter 7.
The Motley Fool notes that the majority, or about 70%, of all who file for bankruptcy file for Chapter 7. Ultimately, the choice between Chapter 7 and Chapter 13 bankruptcy hinges on individual financial circumstances and goals.