Chapter 7 vs Chapter 13: What to Do When Bankruptcy Shows Up?

Like many people who file for bankruptcy, you may have found yourself there expectedly without ever having seen it coming. The devastating consequences to your credit report, assets, and finances have sunk in and you feel like you have hit rock bottom. There are no positive outcomes with bankruptcy and your money management will never be the same.

Thankfully, at Roy & Associates, we have the knowledge and experience to restore your financial freedom during a difficult bankruptcy case. It all depends upon which type of bankruptcy you file for, which can only be determined by your unique situation. Our professional team has compiled the differences for Chapter 7 vs Chapter 13 and when you should file for each to help make your best bankruptcy choice.

Bankruptcy Basics

For those who do not understand bankruptcy in-depth, it is a process forced upon the insolvent or those who cannot pay back their debts. In the end, they have tried everything from working a second job to borrowing from a family member, but the outcome remains the same.

This happens for a variety of reasons such as expensive medical bills, unfair divorce debts, credit card debt, and unexpected job loss. Generally, the person’s debts exceed their income in most cases. Bankruptcy is dictated by the courts to appease creditors and help you get back on your feet.

However, the federal government’s aid to your rescue does not come without severe consequences to your finances. Credit scores are lowered by astronomical figures so it takes years for those who have filed for bankruptcy to recover. In some cases, cash, property assets, or both are taken from their possession to pay different types of debt.

Chapter 7 vs Chapter 13

While your bankruptcy situation may seem hopeless, there is wisdom contained in which kind you take, depending upon your circumstances. Being the main two, Chapter 7 and Chapter 13 are heavy contenders for your signature on their court papers. Here are the differences between them so you can discern which one is right for you.

Chapter 7Chapter 13
Repayment FundamentalsCancels debt (with some exceptions)Debt Repayment Plan
Filing EligibilityIndividuals and businessesIndividuals only
Income RequirementsCannot pay back their debts with incomeBelow $419,275 of unsecured and $1,257,850 secured debt
Completion Timeline90-100 days3-5 years

Repayment Fundamentals

The basic repayment fundamentals of Chapter 7 and Chapter 13 differ from each other. Chapter 7 functions by canceling debts altogether and requiring you to sell the nonexempt property to pay back as much as you can. However, Chapter 13 allows your debt to remain, partnering alongside you to create a reasonable monthly payment plan.

Filing Eligibility

Who can file for each kind of bankruptcy varies from the individual/group filing. If you are a business owner whose company has plummeted, you are only entitled to Chapter 7, even if you have a reasonable plan to repay your debts. Individuals have the ability to file for either Chapter 7 or Chapter 13, depending upon their current income and debt amount.

Income Requirements

To receive the zero-debt benefits of Chapter 7 bankruptcy, one has to prove in court that they cannot repay what they owe. They will take a Chapter 7 Means Test, which will only pass if their income is low enough. Chapter 13 income requirements contrast Chapter 7 in that your dollar amount has to be below $419,275 of unsecured debt or $1,257,850 of secured debt.

Completion Timeline

Chapter 13 bankruptcy filers must be prepared for the long haul with three to five years in their court-approved repayment plans. For those who have acquired hundreds of thousands in debt, the money cannot be paid off quickly and takes copious effort. On the other hand, only 90-100 days are required for Chapter 7 due to credit counseling. This is a program that informs persons how to wisely handle their money.

We Recommend Chapter 7 if:

1). You want to become debt-free

For insolvents with debt above their heads, an amount that cannot be paid back in their lifetime, starting a clean slate is a wise option. The pressure to repay overwhelming debts such as student loans is take away so you can focus on moving forward rather than looking backward. There are a few exceptions, such as child support and alimony. You will be allowed to start over your credit score, purchase necessities, and build a savings account.

2). You want to stop debt collectors

Debt collectors are notorious for hunting down the weak, demanding they pay what is due or else they will sue. They will often appear at your home to collect funds, call you on the phone, and even file lawsuits against you. Chapter 7 bankruptcy filers will be protected from a pressing debt collector and aggressive creditors through the automatic stay.

3). You want a flexible budget

Those who opt for Chapter 13 bankruptcy repay all longstanding debts through a monthly lump fee that all involved parties split. However, their plan created by the government does not allow for disposable income if something were to arise. When there is no debt present by Chapter 7, you can allocate money from your checking however you wish.

We Recommend Chapter 13 if:

1). You want to protect your assets

Although you will work on a three to five-year repayment plan for all your debts, the federal government cannot touch your assets. Deciders of Chapter 7 bankruptcy will be forced to advertise their property and other items for sale while they give away cash upfront. Chapter 13 will protect your assets and keep them in your private possession.

2). You want to improve your credit

Creditors will not look well at any kind of bankruptcy on your credit report, but they will view Chapter 13 more favorably. This is because you had a high enough income to sustain paying your debts, which appears on paper better than having all your debts wiped clean. They need to know they can trust you again with a car, home, and other loans, especially if you filed for bankruptcy. In some cases, bankruptcy may improve your credit, overshadowing previous defaults or late payments.

3). You want to stop a foreclosure

Even if bankruptcy courts understand Chapter 7 bankruptcy filers, that does not protect them from mortgage payments, losing their home to foreclosure. Canceling all of their longstanding debt helps tremendously but does not solve their newfound homelessness. Chapter 13 bankruptcy stops foreclosures from occurring, so even while they are stuck on a repayment plan, they can have confidence in where they live.

Our Professional Bankruptcy Opinion

Roy & Associates is a law firm of knowledgeable bankruptcy attorneys that have served clients in West Palm Peach faithfully. We have had hundreds of bankruptcy case experiences that have informed our professional opinion on the best course of action to take. Again, your circumstances determine whether we would recommend you to Chapter 7 or Chapter 13 bankruptcy.

As attorneys and lawyers, our job is to act as advisors to our clients and walk alongside them during complex legal crises, helping them make the best decision possible. Roy & Associates is proud to serve the West Palm Beach community with every case received, from bankruptcy and litigation to divorce and real estate.

We are here to assist you with any questions regarding Chapter 7 vs Chapter 13 bankruptcy or advise you on any legal matters. Contact our law firm online or by calling 561.729.0095.