3 ways Chapter 7 bankruptcy differs from Chapter 13

On Behalf of | Feb 23, 2022 | Chapter 13 Bankruptcy |

Perhaps you’re one of many people in Tennessee and across the country with a pile of medical bills to deal with in recent years. Even with insurance, your debt might continue to rise. If you were to say that, at some point, you resorted to using your credit card to make payments, either for medical debt, your mortgage or daily living expenses, you definitely wouldn’t be alone in your struggle. In fact, many people in this state and others have recently filed for bankruptcy.

Chapter 7 bankruptcy is one of the programs often used to help alleviate personal debt. In some situations, however, you might determine that Chapter 13 bankruptcy better fits your particular needs and financial goals. These two programs differ from each other in three distinct ways.

Your income level is relevant to both programs

Before filing a bankruptcy application for Chapter 7 or Chapter 13, you would take a “means test.” The purpose of this test is to compare your income with the median income level throughout the state. If it’s at or below a specific level, you might qualify for Chapter 7 bankruptcy. If, however, it is above the designated level, you might be ineligible for Chapter 7 but eligible for Chapter 13, instead.

You might hear the Chapter 13 program referred to as “the wage earners’ bankruptcy.” This reference is directly related to the idea that application requirements include having a certain amount of income at your disposal.

Liquidation of assets versus restructured payment plans

Both Chapter 7 and Chapter 13 bankruptcy programs can be used as valuable financial tools to help resolve a debt problem and to help restore financial stability. The process through which this occurs is unique to each program. In Chapter 7 bankruptcy, for instance, the usual way to alleviate debt is asset liquidation. This means that your assets are for sale on the open market. Proceeds from those transactions would then pay back your lenders.

If you file for Chapter 13, on the other hand, you might be able to retain ownership of your home, vehicles and other assets. As opposed to asset liquidation, this bankruptcy program operates through restructured payment plans, which is another reason why you must demonstrate that you have a reliable means of income to qualify. Your lenders would agree to lower payments or extend the life of your loan so you may keep possession of your assets while continuing to make payments toward your debt.

Each program remains on your credit report for a different length of time

If you’ve been hesitant to file for bankruptcy out of fear that it will ruin your credit score, there are several key points you’ll want to consider. First, while it’s true that bankruptcy would appear in your credit report, it doesn’t stay there forever. A Chapter 7 bankruptcy typically remains on a credit report for 10 years. If you seek debt relief through the Chapter 13 program, the filing usually remains on your credit report for seven years.

Many people think that they will not be able to have a credit account or obtain a loan with bankruptcy on their credit report. In fact, there are often options available for personal loans after bankruptcy. It may also be possible to obtain credit, although the way this would occur would differ slightly between the two programs. Learning as much as you can about Chapter 7 and Chapter 13 bankruptcy ahead of time can help you determine which program best fits your current financial needs.


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