For most individuals there are two different types of Bankruptcy filing — A Chapter 7 liquidation and a Chapter 13 repayment plan. Both serve the same purpose of providing relief from your debts. But each has advantages and requirements that will determine which is the best filing for any individual debtor or whether the individual is even qualified to file that particular chapter.
Chapter 7 generally eliminates or discharges all unsecured debts of the individual filing. Credit card debt and medical bills, for example, would not have to be paid back by the individual. Secured debt such as a mortgage or car loan would have to be paid back if the individual wanted to keep those items. However, there is a trade off in that the Court appointed trustee will seek to liquidate any non-exempt property to provide payment to the creditors that are discharged. Each state provides a different list of property that is exempt from liquidation by the trustee. Reviewing those exemptions is one reason that a good bankruptcy attorney is essential when considering filing Chapter 7 Bankruptcy. There are also debts such as taxes, alimony, student loans and child support that are rarely discharged by a Chapter 7.
A Chapter 13 is a restructuring of debt with a plan that pays off creditors in three to five years. None of the individuals assets are liquidated by the trustee. Instead the individual pays a monthly payment that pays anywhere from zero to one hundred percent of the outstanding debts. Chapter 13 is typically used if the individual has assets that need to be protected from liquidation, if taxes need to be paid, to save a house by paying back mortgage payments or to possible strip a lien from a second mortgage or line of credit . A Chapter 13 also can be used if an individual does not qualify for a Chapter 7 due to income requirements or a previous bankruptcy within 8 years.
A Chapter 7 has an income requirement. Although there are many factors in determining if an individual qualifies, it is generally based on the county that the individual lives in and the number of dependents. A Chapter 13 does not have a maximum income, but it does have a maximum limit on the amount of secured debt and unsecured debt an individual can have — currently $1,081,400 in secured debt and $360,475 in unsecured debt.
Both Chapter 7 Bankruptcy and Chapter 13 Bankruptcy have benefits and costs that should be considered when deciding which is best for any individual. Chapter 7 offers a relatively quick method of getting rid of debts and getting a fresh start. Chapter 13 offers a way to restructure debts, protect assets and better manage finances. It is essential to let an experienced attorney evaluate your situation to determine which chapter of bankruptcy is best for you.