When you file for bankruptcy, you may qualify for either Chapter 7 or Chapter 13. Each “chapter” has its own requirements and process for relieving debt you cannot repay.
Understanding the important differences between these chapters can help you decide whether bankruptcy makes sense for your situation.
Liquidation vs. reorganization
Chapter 7 bankruptcy liquidates eligible debts. If you qualify for Chapter 7, you do not have to repay these unsecured obligations. However, it will impact your credit score for several years.
Conversely, Chapter 13 bankruptcy provides a reorganization plan. With this arrangement, you make a fixed payment for three to five years before receiving a discharge for the remaining debt. Chapter 13 bankruptcy also has a negative credit score impact.
To file for Chapter 7 bankruptcy, you must pass a “means test,” which compares your income to your debts. If the guidelines find that you have the ability to repay some of your debt, you may file for Chapter 13 but not Chapter 7 bankruptcy. Only those who cannot repay debt after reasonable expenses can file for Chapter 7 discharge.
While either individuals or businesses can qualify for Chapter 7 bankruptcy, only individuals can file for Chapter 13. As of 2021 guidelines, Chapter 13 bankruptcy is available for those who have less than $419,275 of unsecured debt or $1,257,850 of secured debt. Secured debt has collateral such as a home or vehicle that the lender can seize to repay the unpaid loan.
Many individuals find that filing for bankruptcy creates a positive financial future when they cannot see their way out of debt.