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Chapter 7 vs. Chapter 13 Bankruptcy: Which one should you choose?

On Behalf of | Mar 12, 2015 | Bankruptcy |

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People who file for bankruptcy in the U.S. most commonly file for Chapter 7 or Chapter 13 based of the circumstances of their case.

Many Americans struggle with the burden of financial debt on a regular basis. From excessive medical bills to maxed out credit card accounts, people are fighting to keep their heads above water. In some cases, people turn to bankruptcy as a way to escape this financial turmoil. Although filing for bankruptcy may stain a person’s credit record for several years, it can give people the chance to start fresh. Before people can submit their bankruptcy forms, they must determine which chapter of bankruptcy best meets their needs.

According to the United States Courts, approximately 936,795 people filed for bankruptcy in 2014. More than 619,000 people filed for Chapter 7 bankruptcy, while just over 310,000 people filed for Chapter 13. These two most common types of bankruptcy have distinct differences, as well as certain similarities.

A look at Chapter 7

Chapter 7, also referred to as liquidation bankruptcy, releases people from their financial obligations by discharging their debt. People who file for Chapter 7, however, run the risk of losing any property or assets that are not considered exempt. Not just anyone can file for Chapter 7 bankruptcy, according to the United States Courts. Applicants for this type of bankruptcy must qualify by passing the means test. This short evaluation looks at the applicant’s debt to income ratio, and determines whether he or she falls below Kentucky’s median income level. Once approved, the debtor must take a credit counseling course, submit completed paperwork and attend the creditors meeting.

At the creditors meeting, the trustee appointed to the case will review the circumstances of the bankruptcy and determine whether reclamation of the debtor’s property is necessary. Any property or assets that are seized may be redistributed to the creditors in an attempt to repay the owed debt. Once the case is discharged, the debtor is no longer responsible for these expenses.

Chapter 13 defined

According to the Federal Trade Commission, Chapter 13 bankruptcy works as a structured repayment plan. It allows people to keep their property and repay their debt. Under Chapter 13, the trustee calculates a monthly payment plan based off of the amount of debt owed, as well as the debtor’s income level. The monthly payment is then allocated to certain creditors. The debtor has three to five years to repay the debt.

Obtaining legal counsel

People are not required to have an attorney in order to file for bankruptcy in Kentucky. Yet many debtors have found that obtaining legal counsel from an established bankruptcy attorney may be extremely helpful. The bankruptcy process can be overwhelming, and a lawyer may be able to simplify the process.



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