Individuals have two main options for bankruptcy: Chapter 7 and Chapter 13. These are vastly different in the way that they manage your debts. They also have different credit penalties and are well-suited to handling specific types of debt. In this article, we’ll take a look at some of the main differences between Chapter 7 and Chapter 13 and reasons why you would prefer to file under one or the other.
Understanding Chapter 7 Bankruptcy
Once you file for a Chapter 7 bankruptcy, all of your major assets become part of the bankruptcy estate to be maintained and managed by the bankruptcy trustee. The trustee will look for property that is valuable and cannot be exempted either under federal or Oregon-state exemptions. This property is sold off and presented to your creditors as a payoff and then your debts are discharged.
Chapter 7 Bankruptcy Requirements
In order to file under Chapter 7 bankruptcy, you must either make less than the state median household income in Oregon (which is adjusted yearly) or you must pass a means test. The means test requires that you submit all of your expenses and income to the court and if it’s determined that you cannot afford to repay your debts, you will be granted a Chapter 7 bankruptcy (in theory). Even in cases where you do pass the means test, the court may decide that you must file under Chapter 13 or otherwise deny your Chapter 7.
Since the only guaranteed way to file under Chapter 7 is to earn less annual income than the state median, the majority of those who file under Chapter 7 don’t have significant assets to liquidate. Most of the time, creditors go away empty-handed and the debtor earns the full discharge of unsecured debts.
Chapter 7 Discharges Unsecured Debts
What Chapter 7 does better than other kinds of bankruptcy is discharge unsecured debts. These debts include personal injury judgments, medical expenses, credit card payments, and personal loans. Debts secured by collateral such as mortgages and car loans can be discharged in Chapter 7, but you will lose any rights to the property. For this reason, those with more unsecured debts tend to file under Chapter 13 as opposed to Chapter 7.
Chapter 7 Credit Penalties
A Chapter 7 bankruptcy will stay on your credit report for ten years and it will be another ten years before you can file another Chapter 7 bankruptcy. However, if you have a lot of claims on your credit already, your credit rating is unlikely to suffer if you file under Chapter 7 since it’s already pretty bad. You can then set about rebuilding your credit with a fresh slate as opposed to paying down multiple claims that are destroying your credit anyway.
Understanding Chapter 13 Bankruptcy
On the one hand, Chapter 13 bankruptcies take longer, cost more, and require you to repay your priority debts. On the other hand, you’ll take less of a hit on your credit report.
Instead of liquidating your assets to make your creditors whole, your debts are reorganized into a single lump-sum payment. The bankruptcy will last either three or five years during which you will make monthly payments to the bankruptcy trustee. The trustee will then pay these sums to your creditors. At the end of the Chapter 13, you may qualify for a discharge of some of the lower priority debts. In Chapter 13, unsecured debts are considered the lowest priority.
Chapter 13 Manages Secured and Unsecured Debts
In Chapter 7, you list all your current debts and then apply for a discharge. In Chapter 13, you list all your debts and then present the court with a repayment plan. Each type of debt is assigned a priority level with debts like car loans and mortgages getting the highest priority. Unsecured debt like medical bills or credit card debt is given the lowest priority.
In some cases, Chapter 13 affords debtors the ability to pay some (but not all) of their secured debts while still keeping the property that secures the debt. This is known as a “cramdown”. The cramdown shaves off the interest on the loan. A vehicle or home is re-appraised and assigned a current value. This value then becomes the sum that the debtor is required to repay if they want to keep the property.
Chapter 13 affords debtors the ability to save their homes and cars. In Chapter 7, the debtor would be divested of the loan but they would also lose the property for which the loan was extended. Chapter 13 allows debtors to repay their debts and arrearages over a 5-year period keeping their most valuable assets at the same time.
Chapter 13 Bankruptcy Requirements
You can’t make too much money to qualify under Chapter 13. You can, however, owe too much money. The minimums are shifted periodically for inflation. As of now, you cannot owe more than $394,725 in unsecured debt or $1,184,200 in secured debt.
Naturally, you probably want to know what happens if you make too much money to file under Chapter 7 and you owe too much money to file under Chapter 13. In that case, you would be forced to file under Chapter 11 which is similar to Chapter 13 but does not have a fixed end date.
Which Bankruptcy Chapter is Right for Me?
Those with more secured debt than unsecured debt tend to file under Chapter 13 more often. That doesn’t mean that they wouldn’t necessarily benefit from a Chapter 7 discharge. It just means that for their goals, Chapter 13 makes more sense. It generally makes sense when you’re looking to save your home or vehicle from default and repossession.
Additionally, those who qualify under Chapter 7 may be better off still opting for Chapter 13. Chapter 13 bankruptcies are removed from your credit report after seven years as opposed to ten. If you need to file for bankruptcy again, your wait period is shorter if you file under Chapter 13.
Talk to a Eugene, OR Bankruptcy Attorney Today
If you’re contemplating bankruptcy as a means of managing mounting debt, Butcher Law Office, PLLC will sit down and take you through your options. During our meetings, we’ll discuss your goals, debts, and the prospects of repayment. Then we’ll come up with a plan that meets your individual needs. Don’t wait until you’re facing lawsuits, wage garnishments, and liens. Talk to Tom today.