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Bankruptcy Options: Chapter 7 vs Chapter 13
Understanding when and how bankruptcy can provide relief
What Is Bankruptcy?
Bankruptcy is a legal process that provides relief from overwhelming debt. It's a last resort option that can eliminate or restructure debts under court supervision.
Chapter 7: Liquidation Bankruptcy
How It Works
Chapter 7 eliminates most unsecured debts in 3-4 months. A trustee may sell non-exempt assets to pay creditors, but most filers keep all property.
Eligibility
- Must pass means test (income below state median OR limited disposable income)
- Cannot have filed Chapter 7 in past 8 years
- Must complete credit counseling
What Gets Discharged
- Credit card debt
- Medical bills
- Personal loans
- Collection accounts
- Utility bills
- Some older tax debt
What Cannot Be Discharged
- Student loans (usually)
- Child support and alimony
- Recent tax debt
- DUI-related judgments
- Secured debts (unless you surrender property)
- Debts from fraud
Timeline
- Day 1: File petition, automatic stay begins
- Week 4-6: Meeting of creditors
- Month 3-4: Discharge granted
Cost
- Filing fee: $338
- Attorney: $1,000-$3,500
- Credit counseling: $50-$100
Chapter 13: Reorganization Bankruptcy
How It Works
Chapter 13 creates a 3-5 year repayment plan where you pay what you can afford. Remaining dischargeable debts are eliminated after completion.
Eligibility
- Regular income required
- Unsecured debt under $465,275
- Secured debt under $1,395,875
- Must have filed tax returns for past 4 years
Benefits Over Chapter 7
- Keep all property (no liquidation)
- Stop foreclosure and keep home
- Catch up on missed mortgage/car payments
- No means test requirement
- Can strip second mortgages in some cases
Payment Plan
- Based on disposable income
- 3 years if below median income
- 5 years if above median income
- Must pay priority debts in full
- Unsecured creditors get what's left
Cost
- Filing fee: $313
- Attorney: $3,000-$6,000
- Plus repayment plan amount
Comparing Chapter 7 vs Chapter 13
| Factor | Chapter 7 | Chapter 13 |
|---|---|---|
| Duration | 3-4 months | 3-5 years |
| Property | May lose non-exempt | Keep all property |
| Income requirement | Below median or pass means test | Regular income needed |
| Debt limits | None | Yes (caps listed above) |
| Home foreclosure | Cannot stop | Can stop and catch up |
Credit Impact
Chapter 7
- Stays on report for 10 years
- Score drops 130-240 points
- Can rebuild to fair credit in 2-3 years
Chapter 13
- Stays on report for 7 years
- Score drops 130-200 points
- Shorter recovery time than Chapter 7
The Automatic Stay
Upon filing, an automatic stay immediately stops:
- Collection calls and letters
- Lawsuits
- Wage garnishment
- Foreclosure proceedings
- Repossession
- Utility shutoffs
Alternatives to Bankruptcy
- Debt management plans
- Debt settlement
- Debt consolidation
- Negotiating with creditors
- Increasing income/reducing expenses
When to Consider Bankruptcy
- Debt exceeds annual income
- Would take 5+ years to pay off even with aggressive plan
- Facing foreclosure or repossession
- Wage garnishment affecting basic needs
- Medical bills overwhelming finances
- Other options have failed or aren't viable
Finding a Bankruptcy Attorney
- Look for board-certified bankruptcy specialist
- Check state bar association
- Ask about experience and success rate
- Get fee structure in writing
- Take advantage of free consultations