For debtors who have exhausted all other avenues and need help finding their financial footing, filing Chapter 7 or 13 bankruptcy is an option. Filing bankruptcy is more common than you may think, and it’s important to know the differences between each type so you can correctly file for your circumstances.
Most debtors file either a Chapter 7 or Chapter 13 bankruptcy, which allow you to either liquidate or reorganize your debts, respectively. With help from a lawyer, you can easily determine which type is right for your financial situation and goals. Below, we will detail the differences between Chapter 7 and Chapter 13 bankruptcy, so you can meet with a bankruptcy lawyer and decide which is best for you.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy allows a debtor to sell off their assets, using the proceeds to pay back creditors. When a debtor files Chapter 7, they meet with a bankruptcy trustee who will gather and sell the debtor’s nonexempt assets. The Bankruptcy Code will exempt some of a debtor’s assets, but any property rendered nonexempt can be liquidated to pay the claim. Property such as homes and cars may be subject to liquidation to pay back creditors.
One of the benefits of filing Chapter 7 is the ability for debtors to discharge certain debts, known as “unsecured debt”. When a debt is labeled unsecured, a debtor has no liability for the debt and is not required to repay it to creditors. However, not every debtor receives the right to discharge, and some types of debts (such as student loans and alimony) are not dischargeable. Both individuals and businesses can file this type of bankruptcy.
Unsecured debts commonly discharged through Chapter 7 bankruptcy include:
- Credit card balances
- Medical and dental bills
- Personal loans
- Lawsuit judgements
Chapter 7 Bankruptcy Eligibility Rules
To qualify for Chapter 7 bankruptcy in Georgia, a debtor’s monthly income cannot be greater than the state’s median. If their monthly income is greater, they must pass a “means test” to determine if their filing is a presumption of abuse. Debtors with income greater than the median can declare some unsecured debts and specified expenses (such as childcare and medical costs) as deductions in an attempt to qualify.
If a debtor passes the means test, they must then provide the following:
- a detailed list of their assets and liabilities
- current income and expenses
- a statement of financial affairs
- a schedule of executory contracts and unexpired leases
- a copy of the tax returns or transcripts for the most recent tax year
The trustee will assess the list to see if a debtor qualifies for a bankruptcy petition, as well as if they have any assets that can be sold or liquidated to pay their debts. Trustees will handle every aspect of asset sales and liquidation while following the bankruptcy exemption rules for Georgia. Debtors interested in keeping their assets should consider Chapter 13 instead.
What is a Chapter 13 Bankruptcy?
For debtors that do not pass the means test or prefer not to liquidate their debt, filing for Chapter 13 bankruptcy is the best option. Chapter 13 bankruptcy allows wage earners to reorganize their debt and create payment plans that pay off their debt over the course of three to five years. Debtors who want to quickly pay off non-dischargeable debt or catch back up on important payments (such as mortgages) can also benefit from this option. Chapter 13 is only available to individuals, however, not businesses.
The largest benefit of filing Chapter 13 is the fact that a debtor is able to protect important assets, such as their home, from repossession and liquidation. Instead of selling your property, court officials assess your financial situation, hold a meeting of creditors, and determine a repayment plan that works for all parties involved. Your repayment balance will not include interest charges, late fees, or other costs that drive up the balance over time, making it easier to pay off within the given timeline.
With a Chapter 13 filing, your debts will not be discharged, merely reorganized to allow you to pay back what you owe in a timely fashion. At the conclusion of the specified repayment period, the court will discharge any outstanding debt.
Eligibility Rules for Chapter 13 Bankruptcy
Eligibility rules for Chapter 13 bankruptcy state that a debtor is eligible for chapter 13 relief as long as their unsecured debts are less than $394,725 and secured debts are less than $1,184,200. These figures adjust periodically to reflect changes in the consumer price index.
A debtor also cannot file under Chapter 13 if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court. In addition, a debtor under Chapter 13 must have received credit counseling from an approved agency within 180 days before filing. A debtor will also have to show that they have not filed Chapter 7 bankruptcy in the previous four years, or Chapter 13 bankruptcy in the previous two.
Which is Better for You — Chapter 7 or Chapter 13?
To find the right bankruptcy filing, a debtor must decide which filing most benefits their financial situation. For some, liquidation of assets is the smartest decision for them, while for others, a reorganization of debts will provide the most benefits. Thankfully, you do not have to make the decision alone. You can partner with a skilled bankruptcy lawyer that will help explore your options and see what works best for you.
To learn more about Chapter 7 and Chapter 13 bankruptcy, as well as how filing can help you get out of debt, reach out to CMC Law by calling 494-585-0040. In no time, we can set up your free bankruptcy evaluation and begin your journey to debt relief.
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