Chapter 7 vs Chapter 13
If you’re struggling with debt, filing for bankruptcy may be an option worth considering. You can choose from several types (known as chapters) of bankruptcy, but the most common ones are Chapter 7 and Chapter 13.
As a personal bankruptcy attorney at Lyndon Ruhnke, P.C., I often see individuals grappling with the choice between these two options, each of which has its own benefits and considerations. I am here to guide you through your options and help you make an informed decision.
What Do Chapter 7 and Chapter 13 Bankruptcies Have in Common?
Both Chapter 7 and Chapter 13 bankruptcies offer individuals a chance to eliminate or restructure their debts, providing a fresh start. However, they are designed for different financial situations and come with their own sets of rules and processes.
Fresh Start for Financial Freedom
The primary purpose of both Chapter 7 and Chapter 13 is to allow individuals to regain control over their finances. They serve as legal mechanisms for debt relief, enabling you to wipe the slate clean in accordance with the law. This means that both types of bankruptcy are intended to help individuals escape the burden of overwhelming debt, whether through liquidating assets or a repayment plan.
Legal Protections
In both types of bankruptcy, the court provides certain legal protections. Once you file for either Chapter 7 or Chapter 13, an automatic stay goes into effect. This stay stops all collection activities, including lawsuits, wage garnishments, and creditor phone calls. This immediate relief allows you to breathe a little easier during what is often a stressful time.
Debts That Can Be Discharged
Both bankruptcy chapters can help eliminate unsecured debts like credit card bills and personal loans. Additionally, some specific types of debts can be discharged under both chapters. However, it’s essential to understand that certain debts, like student loans and child support, generally cannot be eliminated through bankruptcy.
Key Differences Between Chapter 7 and Chapter 13
While Chapter 7 and Chapter 13 share the same end goal of financial relief, they differ in terms of process, eligibility, and outcomes.
Duration and Process
Chapter 7 bankruptcy typically takes about four to six months to complete. It involves liquidating non-exempt assets to pay back creditors. Chapter 13 involves a repayment plan that lasts three to five years and allows you to pay off a portion of your debts over that period. This difference in duration can influence which option is more appealing based on your immediate financial situation.
Eligibility Requirements
To qualify for Chapter 7, you must pass a means test that compares your income to the median income in your state. If your income is above this threshold, you may not be eligible for Chapter 7 and may need to consider Chapter 13 instead.
For Chapter 13, there are no income limits, but you must have a regular source of income to fund your repayment plan. The maximum amount of unsecured and secured debt is also capped, which can limit eligibility for some high-debt individuals.
Impact on Assets
In Chapter 7 bankruptcy, you might lose some of your non-exempt assets as they are sold (liquidated) to repay the debt. However, most filers can benefit from exemptions that protect certain property. Conversely, Chapter 13 allows you to keep your assets while following a repayment plan. This aspect can be a deciding factor for many individuals who own valuable items or property.
When You Should File Chapter 7 vs. Chapter 13 Bankruptcy
Chapter 7 may be the right choice for you if any of the following applies to you:
High unsecured debt: If most of your debt is unsecured, such as credit cards or medical bills, and you don’t have many assets at risk, Chapter 7 can provide a quick remedy. This option is ideal for individuals who are looking for a swift resolution to their debt problems without the burden of a lengthy repayment plan.
Limited income: If your income falls below the median level for your state, you might qualify for Chapter 7. This option is particularly useful if you are experiencing financial hardship due to unemployment or underemployment, as it can eliminate debts relatively quickly, allowing you to focus on rebuilding your financial life.
Desire for a fresh start: With Chapter 7, you can eliminate overwhelming debt and move forward without the weight of past financial mistakes. If you feel that your financial situation is unmanageable and you prefer a quick discharge, this option is often the most beneficial.
However, Chapter 13 may be more suitable depending on your financial circumstances and future goals. You might need to consider filing under Chapter 13 if you have:
Regular income: If you have a steady income and wish to keep your property while repaying some of your debts, Chapter 13 could be a better fit. This option enables you to manage your debts through a structured repayment plan, allowing you to catch up on missed payments for mortgages or car loans.
Valuable assets: If you have assets that you do not want to lose, such as a home or car, Chapter 13 allows you to keep them while creating a plan to pay off your debts over time. This option is attractive for those who have more valuable assets that they want to protect from liquidation.
Desire for debt restructuring: In cases where you have equity in your home or other properties, Chapter 13 enables you to restructure your debts. This restructuring can lower your monthly payments and make them more manageable while still allowing you to keep your assets intact.
Factors to Consider When Deciding Between Chapter 7 and Chapter 13
When making a choice between Chapter 7 and Chapter 13 bankruptcy, you need to weigh several factors to ensure you make an informed decision that aligns with your financial goals. These factors include:
Income level: Evaluate whether your income meets the requirements for Chapter 7 or if you're more suited for Chapter 13.
Debt types: Consider the type of debts you owe, as certain debts may influence your choice.
Assets at risk: Reflect on your assets and the importance of keeping them when making your decision.
Time frame: Determine how quickly you need to resolve your financial woes. Chapter 7 is faster than Chapter 13.
Future financial goals: Think about your long-term financial plans and how each option aligns with those goals.
Impact on credit score: Understand how each type of bankruptcy will affect your credit score and how long it will appear on your credit report.
Tax implications: Consult a tax advisor to understand any potential tax consequences of filing for bankruptcy.
Legal fees: Factor in the costs associated with hiring an attorney for either type of bankruptcy.
Repayment ability: Assess whether you are capable of adhering to a repayment plan if you choose Chapter 13.
Personal feelings: Reflect on how you feel about the stigma surrounding bankruptcy and which option you feel more comfortable pursuing.
If you need legal counsel while considering these and other factors, reach out to my office at Lyndon Ruhnke, P.C.
Can’t Decide Between Chapter 7 and Chapter 13? I Can Help
When your life and future are uncertain due to overwhelming debt, filing for bankruptcy may solve your financial woes. If you have doubts about which chapter to file under, I am here to help. At Lyndon Ruhnke, P.C., I have three offices in Oregon: Portland, Gresham, and Beaverton, but serve clients across the state.