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Chapter 7 and Chapter 13 bankruptcy differences

On Behalf of | Feb 20, 2020 | Consumer bankruptcy |

Many different circumstances can lead to bankruptcy. Maybe you have medical or credit card debt you can’t seem to escape. Maybe you got divorced, and your income has shrunk significantly enough that debt is piling up, or maybe your business is not doing well, which leads to unpaid suppliers and hemorrhaging debt.

No matter the cause, you need a solution to cleanse your finances and start fresh. The stigma against bankruptcy has become nearly extinct in recent years. Many people have chosen bankruptcy as a viable option to rid themselves of overwhelming debt, learn how to correctly manage the money you have and begin a new financial journey. 

Does your credit score take a hit?

Whether you choose Chapter 7, Chapter 13 or Chapter 11(strictly for business and not discussed in this blog), your credit report and score will feel the pain, but not forever. Chapter 7 comes will remain on your report for up to 10 years. Chapter 13 will sit on your report for up to 7 years, but in both instances, after a few years, you can begin rebuilding your credit with a secured credit card or a personal loan (if accepted).

Other differences between Chapter 7 and Chapter 13 

  • Type of bankruptcy 
    • Chapter 7: Liquidation bankruptcy. This means that a trustee sells your property to repay your debts. This option is often a smart one for those of limited income that cannot afford to reorganize their debt into a repayment plan.
    • Chapter 13: Reorganization bankruptcy. The court organizes and orders a repayment plan. Chapter 13 allows you to keep your property if you follow your repayment plan and pay on time. Once the plan has reached its end, all remaining unsecured debt, like credit card and medical debt, will be wiped clean.
  • Filing eligibility
    • Chapter 7: Individuals and business entities. A disposable income threshold, determined by the state’s Chapter 7 means test, must be met to qualify.
    • Chapter 13: Individuals and sole proprietors. Filers cannot have over $394,725 of unsecured debt or $1,184,200 of secured debt (home loan, car loan). Secured debt is any loan backed by collateral.
  • The timeframe of discharge:
    • Chapter 7: Between three and five months
    • Chapter 13: Completion of a repayment plan which usually lasts between three and five years

Chapter 7 exemptions

As mentioned above, Chapter 7 bankruptcy is known as liquidation bankruptcy; thus, your property will be bought and distributed by a trustee to pay off your debts. Exemptions are important to understand because whatever property is exempt is the property you get to keep. Some states allow the filer to determine which exemption status (state or federal) they would like to use. Tennessee is not one of those states. In Tennessee, bankruptcy filers must adhere to state exemption guidelines.

How to apply for bankruptcy

A consumer bankruptcy attorney can provide legal guidance and assist in handling the legalize of applying for bankruptcy. Petitioning includes filling out several bankruptcy-related documents. If you choose to apply for Chapter 13 (reorganization), the court will ask you to provide a proposed repayment plan that the trustee will review and discuss with your creditors before revisions and approval can take place.