Sometimes, debt can grow to the point where finding a way out seems unlikely, if not impossible. Bankruptcy allows individuals the chance to start fresh with their finances.
Which type of consumer bankruptcy is right for you? Whether you file for Chapter 7 or Chapter 13 bankruptcy will depend on a few different factors, including eligibility based on your income and debt totals.
Chapter 13 bankruptcy basics
Chapter 13 sometimes gets called a “wage earner’s plan” or reorganization bankruptcy. This is because it gives the consumer the chance to develop a repayment plan over a three- to five-year period. This court-approved payment plan repays creditors while allowing the consumer some breathing room with a more realistic plan to repay debts. The court appoints a trustee to manage the payments and divide them among creditors.
Filers of Chapter 13 must have steady income. While there is no income eligibility requirement, as of April 2019, individuals are not eligible if their unsecured debt totals more than $1,257,850 and secured debt totals more than $419,275. These amounts are adjusted periodically.
How Chapter 13 differs from Chapter 7
Chapter 7 bankruptcy requires debtors to sell non-exempt assets in order to pay creditors. Consumers must also pass Chapter 7’s income eligibility requirements. Those who are ineligible may only be able to consider filing bankruptcy through Chapter 13.
Unlike Chapter 7, Chapter 13 bankruptcy allows the consumer to retain ownership of property as long as they maintain payments. It also allows those who are upside down on mortgages to remove junior liens through lien stripping. Since not all debts qualify to get removed, you may be able to pay non-exempt debts through the payment plan while the rest are discharged. Another important distinction between the two is that Chapter 13 stays on a credit report for seven years instead of 10 as with Chapter 7.
Which form of consumer bankruptcy is right for you will depend on your own unique situation. A bankruptcy lawyer can be helpful in informing you of your options and getting the process started.