There are numerous types of bankruptcy available for both individuals and businesses. People select the type of bankruptcy that they file based on their circumstances. Chapter 7 bankruptcy is one of the options for individuals in need of financial relief. Chapter 13 bankruptcy is the most common type of individual bankruptcy in many different jurisdictions.
There are numerous procedural differences that separate Chapter 7 bankruptcy from Chapter 13 bankruptcy proceedings. The three differences below are perhaps the most significant and important for people to understand.
No means testing requirements
One reason that many people pursuing bankruptcy initiate Chapter 13 proceedings is that they may not qualify for Chapter 7 bankruptcy. For an individual to complete a Chapter 7 bankruptcy, they must first pass a means test. They adjust their income and then compare that to the median in the state for households of the same size. There are no means testing requirements or income caps that restrict Chapter 13 bankruptcy. It is accessible to more people because those with average or above-average income can still qualify.
No liquidation requirements
Chapter 7 bankruptcy may sometimes put personal resources at risk. The filer has to disclose all of their assets to the courts. They can exempt some property from liquidation, but other assets may be vulnerable. The trustee overseeing their case may arrange for the sale of certain assets to repay creditors before the filer becomes eligible for a discharge. Chapter 13 bankruptcies do not have any liquidation requirements. People do not need to worry about the possibility of the courts selling their assets.
The need to complete a repayment plan
One of the reasons that Chapter 13 bankruptcy is available without income limits or asset liquidation is that filers must complete a structured repayment plan. That payment plan is the product of a creditor meeting where they disclose their income and negotiate with creditor representatives and the trustee appointed by the courts.
The filer usually needs to commit the vast majority of their disposable income toward debt payments. They make payments for at least three years but sometimes as many as five years before they become eligible for a discharge. Provided that they complete the repayment plan, they can eliminate the remaining balance on the debts that are eligible for discharge.
Individuals considering a Chapter 13 bankruptcy filing often need help, as the process is relatively complex. Learning more about the different types of bankruptcy can be beneficial for those hoping to regain control of their financial circumstances.
