Bankruptcy law has allowed countless people to break free of debt and get their finances back on track. You don’t have to wait until you’ve hit rock bottom before speaking with a bankruptcy attorney. If you have more debt than you can pay off in a reasonable time period, if you’re being harassed by collections agencies or if you’re in danger of losing your home, it’s time to consider whether Chapter 7 or Chapter 13 bankruptcy is right for you.
Similarities Between Chapter 7 and Chapter 13
All types of bankruptcy have the same basic goal: To get back to fiscal solvency. Most individuals and couples file Chapter 7 or Chapter 13 petitions, both of which have the potential to eliminate dischargeable debt (some debt isn’t dischargeable–ask your bankruptcy attorney about your specific debts).
Another similarity is the pre-filing requirements. Whether you file for Chapter 7 or Chapter 13, you must first complete a bankruptcy court-approved credit counseling course. Your lawyer will file the certificate of completion along with your bankruptcy petition. You’ll also have to complete a post-filing debtor education course.
Both types also give filers instant relief from calls from creditors demanding payment. As soon as your attorney files the petition, an automatic stay goes into effect. This means that by law, creditors and collections agencies must cease all collection activities. As long as the automatic stay is in effect, you’re protected from collection calls, repossessions, foreclosure, wage garnishment, levies and lawsuits.
Differences Between Chapter 7 and Chapter 13
Despite these similarities, Chapter 7 and Chapter 13 are more different than they are alike. Your bankruptcy attorney will carefully review your financial situation to determine which one is best for you. Chapter 7 bankruptcy is often called a “liquidation bankruptcy” because it wipes out all dischargeable debts, including credit cards and medical bills.
In contrast, Chapter 13 is often called “wage earner’s bankruptcy” because it restructures debt and only eliminates a portion of it. Chapter 7 bankruptcies are finalized relatively quickly, but Chapter 13 bankruptcies require a repayment plan, which lasts three to five years. During this period, you’ll pay a set amount to the bankruptcy trustee each month. At the end, your remaining dischargeable debts will be eliminated.
Which Type of Bankruptcy Is Right for You?
Bankruptcy law is complicated, but your attorney can help you figure out which type of bankruptcy is right for you. You might find that the decision is beyond your control if your income is high enough. Your lawyer will use the means test to determine if you can qualify for Chapter 7 or if you must file for Chapter 13.
The first part of the means test involves comparing your monthly income to the median monthly income in your state. This figure is adjusted for household size. If your income is lower than this threshold, then you automatically pass the means test, and you are likely eligible to file for Chapter 7. If your income is higher than the median, your attorney will complete the second part of the means test, which requires calculating your disposable income.
Bear in mind that, even if you do qualify for Chapter 7, it isn’t necessarily the best choice for you. Consider the following comparisons:
- Chapter 7 stays on your credit report for 10 years/Chapter 13 stays on for seven years
- Chapter 7 may cause you to lose some assets/Chapter 13 preserves all property
- Chapter 7 temporarily stops foreclosure/Chapter 13 adds past due mortgage to the repayment plan
- A second Chapter 7 can be filed eight years after the first/A second Chapter 13 can be filed two years after the first one
Get on the road to financial freedom with personalized legal guidance from the Law Office of James J. Gentile. We make the process as simple as possible so you can move forward with your life. Call or click today to request your free, no-obligation consultation at one of our convenient locations in Arizona.