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Chapter 7 vs. Chapter 13

Jul 12, 2019

Which Options Is Right for You?

Making the choice to file for bankruptcy is not an easy one; bankruptcy often carries a negative connotation and many people have misconceptions about bankruptcy that make them hesitant to file. However, in many cases, bankruptcy is the best option for your financial situation. In fact, it can be an ideal debt relief solution.

That being said, there are several different types of bankruptcy. Knowing which one is right for you requires a clear understanding of your specific situation, as well as the pros and cons of each type of bankruptcy.

The two most common types of bankruptcy are Chapter 7 and Chapter 13. In the most general sense, Chapter 7 bankruptcy allows you to discharge your debt, meaning you do not have to pay it back, while Chapter 13 allows you to propose a debt repayment plan. This may make it seem like Chapter 7 is the better choice, but this is not always the case.

Read on to learn more about the differences between Chapter 7 and Chapter 13 bankruptcy to learn which option may be right for you. You can also contact our Washington, D.C. bankruptcy lawyers for a free phone consultation.

The Advantages & Disadvantages of Chapter 7

Chapter 7 is best suited to lower income individuals and families who simply cannot pay back their debts. In this type of bankruptcy, debts are discharged, or liquidated, through the selling of certain properties and assets.

In order to qualify for Chapter 7, you must take a “means test,” which determines whether or not you fall below the median income threshold. If the court decides that, given your income and debt, among other factors, a debt repayment plan would be feasible for you, you will not qualify for Chapter 7 and will need to file for Chapter 13 bankruptcy instead.

Some of the advantages of Chapter 7 bankruptcy include that it:

  • Completely eliminates most—if not all—of your debt
  • Allows you to keep exempt properties/assets
  • Puts an immediate end to creditor harassment
  • Can improve your credit if your credit score is very low
  • Can prevent you from dealing with a water or gas/electricity shut-off
  • May stop foreclosure on your home

Some of the disadvantages of Chapter 7 include:

  • Non-exempt properties/assets will be sold to pay your debts
  • If your credit is okay or good, it will go down after filing
  • Filing will stay on your credit report for up to 10 years
  • You may not be able to eliminate all your debts, including student loans and some tax debts
  • If you have co-signers, they may still be liable for your debts

The issue of exempt/non-exempt property and assets is one of the biggest concerns of those filing for Chapter 7 bankruptcy. In Washington, D.C., you may choose to use either the District’s exemptions list or the federal exemptions list. However, you cannot use both; once you choose one, you must stick with it.

Some common exemptions include personal property up to a certain amount, primary homes/residences, vehicles up to a certain amount, a portion of earned but unpaid wages, and pensions or retirement accounts (with caps, in some cases).

The Advantages & Disadvantages of Chapter 13

In contrast to Chapter 7, Chapter 13 bankruptcy does not completely eliminate your debts but, rather, makes them more manageable. Chapter 13 allows you to submit a debt repayment plan which is then accepted (or negotiated) with your lenders. While you are making payments—and you must make all payments consistently and on time—you get to keep the property you are making payments on.

Some of the benefits of Chapter 13 bankruptcy include:

  • You do not have to worry about your properties/assets being sold to pay off your debts
  • Your short-term quality of life will improve, as creditors will stop contacting you
  • It may be possible to reduce the amount you owe each month
  • You can begin rebuilding your credit sooner rather than later
  • You can get a fresh financial start and get your debt under control

Some of the downsides of filing for Chapter 13 bankruptcy, however, include:

  • It can take three to five years to complete your repayment plan
  • You must meet eligibility requirements in order to qualify
  • You will need to make payments with your “disposable” income
  • Your credit may take a hit, and filing will remain on your report for up to 10 years
  • You will not be able to use or open any credit cards
  • Filing for Chapter 13 may make it more difficult to file for Chapter 7 in the future
  • You cannot get rid of all of your debts, including student debt, by filing for Chapter 13

Generally speaking, you are only eligible to file for Chapter 13 bankruptcy if you have regular income and if your total unsecured debts (those not backed by collateral, e.g. credit card or medical debts) is less than $394,725. Additionally, your total secured debts cannot amount to more than $1,184,200.

Speak with a Bankruptcy Attorney for Free Today

If you are considering filing for bankruptcy and are unsure of whether you should file for Chapter 7 or Chapter 13, the best thing you can do is speak to a qualified bankruptcy attorney. At Capital Justice Attorneys, LLP , our Washington, D.C. bankruptcy lawyers can help you find the right debt relief solution based on your specific circumstances, needs, and goals.

Contact us online or call (202) 760-2887 for a free phone consultation today.

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