Differences Between Chapter 7 and Chapter 13
When it comes to filing bankruptcy, no two cases are the same. This is mostly because no two people are experiencing the same financial situation, which means that they also may not experience the same risks or benefits associated with a particular type of bankruptcy. Many people have little information about the bankruptcy process and know very little about the differences between filing a Chapter 7 case and a Chapter 13 case. In fact, these two types of bankruptcy are quite different and each can provide very different outcomes. Before deciding which type is best for you, consider the following:
Qualification Standards
Chapter 7 is probably the most recognizable type of bankruptcy and the most sought after. Due to its ability to erase debts with little to no cost to the debtor, many people feel this type of bankruptcy is best. However, not everyone qualifies for Chapter 7 and if you file without meeting the criteria, you will find your case dismissed.
Chapter 7 is reserved for those who cannot afford to repay their debts, even over a period of several years. Those experiencing significant financial hardships may benefit from Chapter 7 but must pass the means test in order to qualify. The means test compares your income to the median income level of your state of residence. Your income must be below the median income level of your state in order to qualify for Chapter 7. If your income is equal to or greater than the median income, you will not be eligible for Chapter 7, but may file for Chapter 13 instead.
Handling of Debts and Assets
Debts and assets are handled very differently in Chapter 7 versus Chapter 13. In a Chapter 7 case, debts are erased by the creditor agreeing to absolve you of your debt liability or having some of your assets liquidated to pay creditors. Since Chapter 7 bankruptcy is not a repayment plan, creditors may be eligible to seize and liquidate some of your assets to satisfy the debt owed.
In a Chapter 13 bankruptcy, your debts are repaid through a repayment plan that lasts anywhere between three to five years. This means that your assets are better protected from liquidation by creditors as long as you make your payments on time.
Credit Outcomes
In most cases, a bankruptcy can actually improve your credit by removing the delinquency status from your account. However, a Chapter 7 bankruptcy will appear more damaging to your credit report because your debts are erased rather than repaid. Future lenders look more favorably on a Chapter 13 case since the debts were repaid and satisfied.
Qualification Standards
Chapter 7 is probably the most recognizable type of bankruptcy and the most sought after. Due to its ability to erase debts with little to no cost to the debtor, many people feel this type of bankruptcy is best. However, not everyone qualifies for Chapter 7 and if you file without meeting the criteria, you will find your case dismissed.
Chapter 7 is reserved for those who cannot afford to repay their debts, even over a period of several years. Those experiencing significant financial hardships may benefit from Chapter 7 but must pass the means test in order to qualify. The means test compares your income to the median income level of your state of residence. Your income must be below the median income level of your state in order to qualify for Chapter 7. If your income is equal to or greater than the median income, you will not be eligible for Chapter 7, but may file for Chapter 13 instead.
Handling of Debts and Assets
Debts and assets are handled very differently in Chapter 7 versus Chapter 13. In a Chapter 7 case, debts are erased by the creditor agreeing to absolve you of your debt liability or having some of your assets liquidated to pay creditors. Since Chapter 7 bankruptcy is not a repayment plan, creditors may be eligible to seize and liquidate some of your assets to satisfy the debt owed.
In a Chapter 13 bankruptcy, your debts are repaid through a repayment plan that lasts anywhere between three to five years. This means that your assets are better protected from liquidation by creditors as long as you make your payments on time.
Credit Outcomes
In most cases, a bankruptcy can actually improve your credit by removing the delinquency status from your account. However, a Chapter 7 bankruptcy will appear more damaging to your credit report because your debts are erased rather than repaid. Future lenders look more favorably on a Chapter 13 case since the debts were repaid and satisfied.
