Bankruptcy is definitely a complex process. The average consumer debtor can wind up very confused when trying to determine which chapter under which to file.
Of course, everyone’s circumstances are different, so there is no one-size-fits-all response when figuring out which chapter affords you the most protections under the law. However, with that being said, below are some major differences between filing for bankruptcy under Chapter 13 versus Chapter 7.
Chapter 7 requires a means test
Unless you can pass the means test, you will not qualify to file for bankruptcy under Chapter 7. This test determines whether your income is more than the state median for Pennsylvania and whether you have sufficient disposable income that could otherwise be diverted to paying off your creditors.
No asset seizure under Chapter 13
Filing for bankruptcy under Chapter 7 means that your assets and resources are subject to seizure and sale to satisfy your creditors’ demands for payment. However, under Chapter 13, this is not the case.
Rather, your debts are restructured in a plan that is court-approved. You must adhere to the repayment plan to which you agree, with the trustee over your case repaying your creditors over a predetermined three- or five-year plan. As long as you make your agreed-upon payments, at the end of the period, the remainder of your debt will be discharged.
Chapter 13 lets you keep your home
In some cases, the automatic stay available to filers of bankruptcy becomes permanent and allows you to keep the family home. Chapter 13 affords debtors more options to remain in their homes than Chapter 7 does.
No need to surrender non-exempt property
Many consumers who are deeply in debt refrain from filing for bankruptcy because they dread surrendering non-exempt assets for which they’ve paid dearly. But by filing for bankruptcy under Chapter 13 instead of Chapter 7, you will not have to worry about an asset seizure unless you fail to honor the agreement that was approved by the trustee and the bankruptcy court.
Learn all of your options to make the best decision
Most consumers are not well-versed in the ever-changing U.S. bankruptcy code. That’s why it is always advisable to learn about your options before making the decision to file for bankruptcy.