Lofaro & Headley, LLC


Understanding Chapter 7 vs Chapter 13 bankruptcy

On Behalf of | May 1, 2020 | Bankruptcy

When you begin researching bankruptcy to resolve unmanageable debt, you may see the terms Chapter 7 and Chapter 13. What do these words mean, and how do they apply to your financial situation?

Explore the difference between Chapter 7 and Chapter 13 bankruptcy filings so you can understand your debt relief options.

Basic definitions

With Chapter 7 bankruptcy, the most common type of filing for individuals, you are able to liquidate eligible debts. You do not need to enter a repayment plan, but you must sell certain nonexempt property to repay a portion of the debt if you own assets.

Chapter 13 bankruptcy allows you to reorganize debt. You will repay your creditors an affordable monthly amount that will remain fixed for three to five years depending on your plan.

Eligibility criteria

In general, you must own few assets to qualify for Chapter 7 bankruptcy. You must also pass the bankruptcy means test. The court will review your income to determine whether you earn less than the specified threshold for your household size and geographic location. Credit card bills, medical bills, personal loan debt and other types of unsecured debt can receive a Chapter 7 discharge.

Chapter 13 bankruptcy provides debt relief for higher-income individuals who do not pass the income means test. In addition to reorganizing unsecured debts, this type of filing lets you repay student loans, child support, spousal support and income tax debt over time.

Credit impact

Both a Chapter 7 and Chapter 13 bankruptcy filing have an impact on your credit score. However, each type of filing will allow you to rebuild credit with new credit cards and loans shortly after you complete your court requirements. Usually, a Chapter 13 bankruptcy remains on your credit report for seven years while a Chapter 7 bankruptcy stays on your credit file for 10 years.

Prepare your tax returns, pay stubs, credit card bills and other financial documents. A full review of this information will help determine whether Chapter 7 or Chapter 13 bankruptcy is right for you.