What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
If you’re in a difficult financial situation, you may have considered filing for bankruptcy in New York. And if this is the case, you need to decide between Chapter 7 vs Chapter 13 since these two types of bankruptcy have quite a few differences.
At Grady BK, PLLC, we are committed to providing our New York clients with the one-on-one legal representation they need as they navigate personal bankruptcy in New York. We strive to provide clarity and peace of mind so that you know exactly what to expect and can choose the best type of bankruptcy for your financial situation. In this article, we will discuss the differences between Chapter 7 and Chapter 13 bankruptcy and which option is better.
What Is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is one of the most common bankruptcy options New York residents choose. It provides a very straightforward process that you can complete within a few months, eliminating all of your dischargeable unsecured debt, such as:
- Credit card debt
- Medical bills
- Personal loans
- Utility and service bills
However, not everyone qualifies for Chapter 7, as you must pass the means test. This is an eligibility test that compares your household income against New York’s median income along with your monthly expenses. If you end up qualifying, you could have the majority of your debt discharged, giving you a blank slate to move forward with.
Also, contrary to popular belief, you won’t lose all of your assets when you file for Chapter 7. New York and federal exemptions can help you protect things like home equity, vehicles, household goods, and retirement accounts.
What Is Chapter 13 Bankruptcy?
Now that you know what Chapter 7 bankruptcy is, what about Chapter 13? The next most popular bankruptcy option is Chapter 13, which takes the approach of creating a repayment plan that allows you to pay back a percent of your unsecured creditors over 3 to 5 years. Once you complete your repayment plan, any remaining unsecured debt can be discharged (wiped away).
Most New York residents choose Chapter 13 if they don’t pass the Chapter 7 means test due to having too high an income. However, Chapter 13 also comes with several benefits and is an ideal option for people who:
- Need foreclosure or repossession protection.
- Are behind on their mortgage or car payments.
- Want to protect non-exempt assets.
- Need more time to catch up on secured debts.
Key Differences Between Chapter 7 and Chapter 13
As you can see, Chapter 7 and Chapter 13 bankruptcy have more differences than similarities, especially when it comes to how they approach debt. Here is a clearer breakdown of these differences:
- Eligibility: Chapter 7 has a strict eligibility requirement, which is the means test. Chapter 13 isn’t as strict but does require you to have a regular source of income, and your unsecured debt must be less than $526,700 and your secured debt must be less than $1,580,125.
- Duration: Chapter 7 typically only takes several months from start to finish, whereas Chapter 13 takes 3 to 5 years depending on your repayment plan.
- Property: You may not be able to keep all of your property when you file for Chapter 7 since certain things may be used to pay back your creditors. However, when you file for Chapter 13, you can usually keep all of your property by maintaining your repayment plan.
- Mortgage & car payments: If you’re behind on your mortgage or car payments, you will usually need to pay all past due payments back in the form of a lump sum in order to keep your home and car. But if you file for Chapter 13, any past-due payments can be added to your repayment plan along with your standard monthly payments.
To better understand which bankruptcy option is the right fit for your financial situation, you should consult with a bankruptcy attorney in New York before moving forward.
Frequently Asked Questions
Is Chapter 7 or Chapter 13 faster?
Chapter 7 is a much faster bankruptcy option as it is usually completed in as little as a few months. Whereas Chapter 13 lasts either three or five years in total.
Which bankruptcy lets you keep more property?
Typically, Chapter 13 allows you to keep more of your property since you will slowly pay back your creditors through a 3- to 5-year repayment plan.
Which Chapter is better if you’re behind on your mortgage?
Chapter 13 provides the best solution if you fall behind on your mortgage, allowing you to make your regular monthly payment payments as well as catch up on past due payment payments. Chapter 7 doesn’t provide as much flexibility, usually requiring you to pay a lump sum of all past due mortgage payments.
Can you choose between Chapter 7 and Chapter 13?
Sometimes. But in most cases, New York residents will have to choose one or the other depending on whether or not they pass the means test.
Does Chapter 7 or Chapter 13 hurt your credit more?
Chapter 7 and Chapter 13 affects your credit score the same when you initially file for bankruptcy. The difference is a Chapter 7 will last on your credit report for 10 years before dropping off. On the other hand, Chapter 13 only remains on your credit report for 7 years.
New York’s Top Compassionate Bankruptcy Attorney
Filing for bankruptcy often requires you to compare Chapter 7 vs Chapter 13 to determine which type of bankruptcy is the right fit for your financial needs and goals. At Grady BK, PLLC, we can help you understand what your options are so that you can move forward toward a brighter financial future.
Our New York bankruptcy lawyers will work with you to determine which type of bankruptcy you qualify for and what this will mean moving forward.
Contact us today at 315-299-9005 to discuss your situation with a compassionate bankruptcy attorney in New York. The team at Grady BK, PLLC, is here to address all of your questions and concerns, no matter where you are in the bankruptcy process.
