When you think of bankruptcy, what comes to mind? Is it financial salvation? Probably not.
More than likely, thoughts of overwhelming debt and wondering how you will recover from this financial pitfall without descending into financial ruin are filling your mind. Maybe that sounds grim, but it’s probably not far off from the actual thoughts of those facing, what the average American would consider insurmountable debt, and that is okay.
Bankruptcy had a bad rap for decades, but the tides have begun to shift. More than 658,000 individuals filed for Chapter 7 or Chapter 13 personal bankruptcy between July 2019 and June 2020. To some, those numbers may signal that too many people are facing financial turmoil. While 658,000 is a large number, it’s a number that signals a trust that bankruptcy can serve as a buoy, offering the financially distressed another chance.
But what’s the difference between Chapter 7 and Chapter 13?
Bankruptcy professionals commonly refer to Chapter 7 as liquidation bankruptcy because those accepted must provide their non-exempt assets to pay off their outstanding debts. Other specific distinctions of Chapter 7 bankruptcy include:
- The passing of a means test: Those interested in filing for Chapter 7 have to pass an income means test to be accepted. To pass this test, your annual income cannot exceed the median income of a household the same size. In most cases, Chapter 7 is a better option for individuals or families with very limited or zero disposable income.
- A bankruptcy trustee is appointed to sell off your non-exempt assets.
- Cases last between four and six months. A bankruptcy discharge usually happens between three and four months.
One con of Chapter 7 is that because you are selling off your property to pay off your debts, you aren’t offered any reprieve from your mortgage payments and may still have to face foreclosure or repossession.
Benefits of Chapter 7 include an expedited debt payoff and the ability to begin rebuilding your credit as soon as your discharge is declared. An excellent option to start rebuilding your credit is to apply for a secured credit card. This is a card that you fund, so while you are paying off a “credit card,” you’re paying off the money you deposited. A secured card provides you the credit score benefits of an unsecured card without the fear of going over your limit and ever-increasing interest rates. Chapter 7 stays on your credit report for up to 10 years, so any small step you can make to rebuilding your credit score after filing will be beneficial in the short and long term.
Chapter 13 bankruptcy is quite different, as its focus is debt reorganization and repayment rather than liquidation. Those who cannot pass the means test and have enough disposable income to put toward their debts would be better suited to choose Chapter 13. The specifics of Chapter 13 include:
- Repayment: A Chapter 13 plan focuses on making a deal with your creditors to pay off a portion of your debts within three to five years. If you meet the conditions and the payments are timely, once the repayment plan has run its length, the debt will be discharged.
- To qualify for Chapter 13, your unsecured assets cannot exceed $394,725 in value, and the value of your secured debts cannot exceed $1,184,200.
- You will have to write up a proposed repayment plan, citing how much money you can put toward your debts every month. Once the court approved the repayment plan, all you have to do is pay (on time) and file your yearly tax return.
- You keep all of your property.
- Chapter 13 stays on your credit report for up to seven years.
While it’s dependent on your debt’s size, the amount you would pay the creditors can be equal to the value of your unsecured assets.
What’s the same?
There are two similarities between Chapters 7 and 13. The first is the condition that you will take a financial acumen course to improve your money management. Lastly, an automatic stay provides the filer relief from credit harassment, which halts creditors from sending invasive forms of communication. Don’t let the fearsurrounding bankruptcy fool you.