Empowering Your Financial Future: Choosing Between Chapter 7 and Chapter 13
Are you struggling with debt and wondering which bankruptcy option is best for you? Chapter 7 and Chapter 13 bankruptcies are two common paths individuals consider, each with its advantages and challenges. Understanding the differences between Chapter 7 vs 13 can help you make an informed decision.
Choosing the right bankruptcy option depends on your financial situation and goals. It’s essential to seek advice from a bankruptcy lawyer to navigate the complexities of Chapter 7 vs 13 and determine the best path forward for your unique circumstances.
Quick Summary
Below is an overview of the key points of this blog article.
- Need help deciding between Chapter 7 and Chapter 13 bankruptcy? Understanding the differences can help you choose the best option for your financial situation and goals.
- Chapter 7 Bankruptcy: This option eliminates most unsecured debts (credit cards, medical bills) through liquidation (selling assets) if necessary. It’s ideal for those with lower incomes and mainly unsecured debts.
- Advantages: Debt discharge, fast process (3-6 months), immediate creditor protection.
- Disadvantages: May require selling non-exempt assets, doesn’t help save your house, hurts co-signers’ credit, limited refiling option (8 years).
- Chapter 13 Bankruptcy: This option allows you to create a court-approved repayment plan for your debts over 3-5 years. You can keep your property and potentially reduce interest rates.
- Advantages: Save your property, repay debts over time, eliminate some debt types, protect co-signers, prevent foreclosure, flexible repayment options.
- Disadvantages: Strict budget required, higher costs than Chapter 7, long-term commitment (3-5 years), court oversight, eligibility limits.
- Choosing the right option depends on your specific situation. Consulting with a bankruptcy attorney is crucial to navigate the complexities and determine the best path for your financial recovery.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, sometimes called “liquidation bankruptcy,” allows you to eliminate most of your debts. There’s a test, called the Means Test, to see if you qualify. This option typically benefits individuals with lower incomes and mainly unsecured debts, like credit cards and medical bills.
In certain situations, you may be able to keep your property, even if you owe money on it, such as a car or house.
What Are the Advantages of Chapter 7 Bankruptcy?
Chapter 7 bankruptcy in Wisconsin offers several advantages:
- Debt Discharge: Most of your debts, like credit cards and medical bills, can be eliminated entirely, providing a clean financial slate.
- Immediate Creditor Protection: Filing for Chapter 7 immediately stops creditors from contacting you or taking your wages to collect debts.
- Future Assets Protection: Any money you earn and property you acquire after filing (excluding inheritances) are yours to keep, free from creditor claims.
- No Debt Minimum: There’s no minimum amount of debt required to file for Chapter 7.
- Relatively Quick Process: Chapter 7 cases in Wisconsin typically conclude within 3-6 months, leading to a faster resolution of your debt problems.
What Are the Disadvantages of Chapter 7 Bankruptcy?
While Chapter 7 offers a debt elimination option, there are some important points to consider specific to Wisconsin:
- Losing Non-Protected Property: Wisconsin law protects certain assets from being sold during bankruptcy. However, if you own valuable items exceeding these protections (like a car with a small loan balance or a collection of expensive watches), Chapter 7 might require selling them to repay creditors.
- Temporary Foreclosure Protection: Filing for Chapter 7 briefly stops foreclosure proceedings, but it’s only a temporary solution. To keep your home, you’ll need a plan to catch up on missed mortgage payments. Chapter 13 might be a better choice for saving your house.
- Impact on Co-Signers: If you have co-signers on loans discharged in your Chapter 7 case, they’ll still owe the debt. This can strain your relationship and hurt their credit score. It’s advisable for co-signers to consult with an attorney about their options.
- Limited Refiling: Wisconsin follows federal rules, where individuals who file Chapter 7 must wait eight years from the previous case’s discharge date before filing again.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, known as “reorganization bankruptcy,” allows you to create a manageable repayment plan for your debts. Unlike Chapter 7, there’s no income test to qualify, making it accessible to a wider range of individuals.
Chapter 13 helps you handle all your debts, like ones tied to property, unsecured debts, and more. It lets you keep your belongings, reduce interest rates, and pay off debts on a schedule.
What Are the Advantages of Chapter 13 Bankruptcy?
Chapter 13 bankruptcy offers a structured approach to debt repayment under court protection. Here are some key benefits to consider:
- Save Your Property: Unlike Chapter 7, where non-exempt assets might be liquidated, Chapter 13 allows you to potentially keep all your property, including your car and house, by incorporating them into your repayment plan.
- Reduce Debt Over Time: Unlike Chapter 7, which eliminates some debts entirely, Chapter 13 allows you to repay them over a manageable period.
- Immediate Creditor Protection: Filing for Chapter 13 automatically puts a stop to creditor collection efforts like harassing phone calls, wage garnishments, and lawsuits.
- Eliminate More Debt Types: A wider range of debts can be included in the repayment plan, potentially including debts from fraud or recent luxury purchases.
- Protect Co-Signers: If you complete the plan and repay all debts in full, co-signers on your loans are typically protected from further creditor actions.
- Prevent Foreclosure: Falling behind on your mortgage can be a major concern. Chapter 13 allows you to catch up on missed payments and prevent foreclosure as long as you adhere to the repayment plan.
- Flexible Repayment: Chapter 13 allows more time to repay debts that cannot be eliminated, such as back taxes or child support.
- Multiple Filings Allowed: Chapter 13 allows for repeat filings if your circumstances change. There’s a waiting period between filings, but it can be a helpful option if needed.
- Flexible Payment Options: Chapter 13 plans can be customized to prioritize certain debts and group creditors based on different payment terms, allowing for more control over your repayment process.
What Are the Disadvantages of Chapter 13 Bankruptcy?
While Chapter 13 offers a path to debt relief, it’s important to understand the limitations and potential drawbacks:
- Strict Budget: Chapter 13 involves a court-approved plan requiring a portion of your income for 3-5 years. This may limit your spending on non-essentials and larger purchases during this time.
- Higher Costs: Compared to Chapter 7, Chapter 13 typically has higher legal fees due to the complexity of the repayment plan. There are also court filing fees involved.
- Long-Term Commitment: Successfully completing the plan requires dedication and managing your finances responsibly for 3-5 years. Missing payments could lead to the dismissal of your case.
- Court Oversight: For the entire 3-5 year period, the bankruptcy court will monitor your case. This may involve attending hearings, submitting reports, and following specific financial rules.
- Eligibility Limits: Individuals involved in stock or commodity brokerage are not eligible for Chapter 13 bankruptcy and may need to explore other debt relief options.
What Are the Eligibility for Chapter 7 and Chapter 13 Bankruptcy in Wisconsin?
Chapter 7 Bankruptcy
There are two main ways to qualify for Chapter 7 bankruptcy in Wisconsin:
Median Income Test
This is a simpler test to see if you qualify. Your household’s average monthly income for the past six months is compared to the median income for your family size in Wisconsin. If your income is lower than the median, you likely qualify for Chapter 7.
- To find your average monthly income, add up your income from the last six months and divide by six.
- You can find the Wisconsin median income levels online or by consulting with a bankruptcy attorney.
Means Test
If your income is higher than the median, you’ll need to complete a more detailed Means Test. This test compares your income over the next five years to your allowable monthly expenses.
- If your projected monthly income for the next 60 months is less than $7,475, you pass the Means Test and can likely file for Chapter 7.
- If it’s over $12,475, you likely won’t qualify for Chapter 7.
- If your income falls between these amounts, further calculations are needed to determine eligibility.
Chapter 13 Bankruptcy
Secured and Unsecured Debts
Unlike Chapter 7, Chapter 13 doesn’t have an income requirement. To qualify, your unsecured debt must be less than $383,175, and your secured debt must be less than $1,149,525.
Which One is Right for Me?
Deciding between Chapter 7 and Chapter 13 bankruptcy depends on your specific situation.
Chapter 7 might be a good fit for simpler cases, particularly if you don’t have many valuable assets or complex debts. It typically offers a faster process for eliminating most of your debt.
Meanwhile, Chapter 13 offers more control and flexibility, especially if you want to keep certain non-exempt property or have secured debts you’d like to repay and keep the underlying asset (like a car). However, Chapter 13 involves a court-approved repayment plan lasting 3-5 years.
Your Road to Financial Recovery Starts Today
Deciding between Chapter 7 and Chapter 13 bankruptcy is a significant step towards a fresh financial start. It’s crucial to weigh the pros and cons of each option carefully and seek professional guidance to make an informed choice.
At Miller & Miller Law, LLC, we understand that facing bankruptcy can be overwhelming. Our trusted bankruptcy attorneys are here to help you navigate the complexities of Chapter 7 vs Chapter 13 bankruptcy and find the best solution for your situation.
Contact us today for a free case evaluation and let us help you take control of your financial future. We can also assist you with Bankruptcy Alternatives, Debt Negotiation, and Civil Litigation.
