What Type of Bankruptcy Do I Qualify For and Which One is Best for My Situation?
If you are considering bankruptcy, you may be wondering whether you qualify and which option is best for your situation. You may have heard legal terms like Chapter 7 and Chapter 13, but you really don’t know the difference between the two and which one might work best for you and your family.
Let’s review both types of bankruptcy to help you decide which one might be best for your unique situation.
Types of Bankruptcy: Chapter 7 vs. Chapter 13
There are two main types of bankruptcy for individual consumers under the United States bankruptcy laws:
Chapter 7 Bankruptcy
- This is often referred to as a liquidation.
- This type of bankruptcy allows you to cancel your eligible debts without entering into a payment plan.
- It may involve selling off some assets.
- There is a means test that must be met.
- Your income must be below a certain amount for you to file Chapter 7.
Chapter 13 Bankruptcy
- This is often referred to as a reorganization.
- This type of bankruptcy allows you to partially repay your debts over the course of three to five years.
- Some remaining debts may be discharged at the end of the process.
- To qualify for Chapter 13, you need enough regular income to participate in a payment plan.
While many people are concerned about whether they will qualify for bankruptcy, almost everyone who has debts they cannot afford to pay will be able to qualify under at least one chapter.
Differences Between Chapter 7 and Chapter 13 Bankruptcy
|Chapter 7||Chapter 13|
|Type of Bankruptcy||Liquidation||Reorganization|
|Stop Collection Process||Yes||Yes|
|Maximum Debt||None||$419,275 Unsecured Debt|
$1,257,850 Secured Debt
|Eligibility Restrictions||Pass Means Test|
No "discharged" in prior Chapter 7 in the last 8 years or Chapter 13 in the last 6 years.
No "discharged" in prior Chapter 7 in the last 4 years or Chapter 13 in the last 2 years.
|What happens to unsecure debt like credit cards or medical bills?||Can be Fully Removed||Must Pay Back Some Debt Over Time |
(Minimal to 100%)
|What happens to secure debt like a house or car?||Varies, but fewer options. |
Must be careful that the Trustee doesn't take assets.
Must pay debt in full per contract to keep.
No right to catch up on back payments over time.
|Varies, but your choice with more options. |
Possibly pay less than owed for a vehicle at lower interest rate.
Right to keep house and car and catch up payments over years.
Must be able to make necessary monthly payments.
Each case/plan is customized per your goals.
|How long does it take to receive a discharge?||3-4 Months (Typical)||3-5 Years Plus a Month or Two (Typical)|
|Time Spent on Credit Report||10 Years||7 Years|
Weighing the Advantages of Chapter 7 and 13
Many people qualify for both major types of consumer bankruptcy. If this applies to you, then you will need to decide not only whether to file bankruptcy but also which type to file. Although it is sometimes possible to convert one type of bankruptcy to the other, it can be difficult.
It helps to ask yourself why you are thinking about filing bankruptcy:
- Are you trying to avoid foreclosure?
- Are you trying to stop harassment by debt collectors?
- Are you in trouble with debt because of back taxes, divorce, or troubles with your small business?
In each case, one or the other type of bankruptcy may be more helpful.
Ask for Professional Help
Our experienced bankruptcy lawyers can help you sort out your options and determine which bankruptcy chapter offers you the best protection, given your individual goals. We service clients throughout Nebraska and Iowa and we are here to help.
Contact us to speak to one of our experienced bankruptcy lawyers or to arrange a free initial consultation. If you cannot come to our Omaha offices, we can consult with you by telephone.
Schedule a no-cost consultation today!
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