When potential clients call our office, the two most common questions they ask are which type of bankruptcy they should file and what are the differences. In general, as a consumer, the United States Bankruptcy Code offers two different kinds of bankruptcies – Chapter 7 and Chapter 13. Although both are designed to give debtors a “fresh start,” they differ in important ways. Below is a breakdown of the two.
What is Chapter 7 Bankruptcy?
Chapter 7 is the most frequent bankruptcy filed by consumers. Due to the pandemic and increase in layoffs, now more than ever people are struggling to pay their bills. Fortunately, Chapter 7 bankruptcy was created to help people get a fresh start by eliminating their unsecured debt, such as credit card bills, medical bills, payday loans, and others.
In a Chapter 7 bankruptcy, you do not use any of your disposable income to pay back your creditors. Instead, a bankruptcy trustee is appointed to determine if you have any nonexempt assets that can be sold or “liquidated.” Any proceeds from the sale are then disbursed to your creditors pro rata. This may seem scary, but in practice it is very rare that the trustee finds assets to liquidate. Additionally, when you speak with one of our bankruptcy lawyers in Chicago you will know the likelihood of losing any assets prior to filing, if any.
Chapter 7 bankruptcy is not available to everyone. To qualify you must pass the “means test,” which assesses whether your income is under the state median for a household of your size. If you are above that threshold, you may be able to “rebut the presumption” if you have special circumstances justifying the use of additional expenses to get you within that threshold. The other qualification is to not have received a discharge in a prior Chapter 7 or Chapter 13 within a certain amount of time.
Once a Chapter 7 bankruptcy is filed, it typically only lasts 6 months. If successfully completed, you will receive a discharge and eliminate your qualified unsecured debt.
What is Chapter 13 Bankruptcy?
Unlike in Chapter 7, Chapter 13 requires you to repay your creditors over a three-to-five-year period through a reorganization plan overseen by the bankruptcy court and trustee. Many people prefer Chapter 7 because of the length of time you are in bankruptcy, however, Chapter 13 offers numerous advantages not available in a Chapter 7. For instance, Chapter 13 allows you to save your home if you are facing foreclosure or behind on your mortgage, prevent repossession of your car, and discharge certain debt you otherwise would not be able to under a Chapter 7.
The qualifications for filing a Chapter 13 are less stringent too. To file a Chapter 13, you must not exceed the debt limit which changes periodically, and you can file even if you previously received a discharge in another bankruptcy case.
Once a Chapter 13 case is filed, you will have a confirmation hearing. This hearing is to determine if the plan you filed complies with the bankruptcy code and allows creditors an opportunity to object to their treatment. If the plan is confirmed, the payments you proposed to your creditors is set and your obligation going forward is to continue making your monthly bankruptcy payments.
Either bankruptcy you file protects you from your creditors by virtue of the “automatic stay” which stays or stops creditors from attempting to collect on your debt. This includes attempting to repossess your car, garnish your wages, file a lawsuit, foreclose on your house, and even call or harass you for money.
Contact our Chicago bankruptcy lawyers today!
If you are struggling with debt and need help deciding which bankruptcy is right for you, call DebtPros now at (312) 883-5422 to speak with one of our experienced bankruptcy attorneys. We will provide a free consultation and thoroughly review your case.
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