It may take very little effort to wind up in debt, but it can take months or even years to dig your way back out. If your debts become too overwhelming, filing bankruptcy may be your only option. Consumers may file for Chapter 7 or Chapter 13 bankruptcy protection, depending on their situation. Before you file, it's important to consider the differences between the two to determine which chapter is right for you.
Chapter 7 and Chapter 13 function very differently. In a Chapter 7 bankruptcy, debtors ask the court to eliminate their liability for certain debts in exchange for surrendering some or all of their property. Chapter 7 bankruptcy is typically suited to debtors who have few assets and lack sufficient income to repay their debts. In a Chapter 13 bankruptcy, you keep your assets but you must agree to repay some or all of what you owe over a three- to five-year period. Filing either chapter automatically enforces a stay against your creditors that prevents them from pursuing collection actions against you.
The eligibility guidelines vary for Chapter 7 and Chapter 13. To qualify for Chapter 7, you must successfully pass the means test. The means test measures your median income for the previous six months against state median income levels by household size. If your median income is equal to or less than the median income limit for your family size, you automatically pass the means test and are eligible for Chapter 7. To qualify for Chapter 13, you must have a regular source of income that is greater than your monthly expenses. As of 2011, you may include no more than $360,475 in unsecured debt and $1,081,400 in secured debt in a Chapter 13 case.
Certain types of debts are dischargeable in either type of bankruptcy. These include unsecured debts, such as credit cards, medical bills or personal loans. Certain secured debts, such as mortgage or vehicle loans, home equity loans or payday loans, may also be included in a Chapter 7 or Chapter 13 case. Debtors who file Chapter 13 may also include certain nondischargeable debts in their repayment plan. These include back taxes, child support or alimony payments. These types of debts must be repaid first. Generally, bankruptcy cannot be used to discharge student loans unless you can prove a severe and long-lasting financial hardship that renders you unable to pay.
To receive a discharge in a Chapter 7 or Chapter 13 case, you must complete a course in financial management within 45 days of filing and attend a meeting of creditors. This meeting is an informational session used to verify the information contained in your original petition. Chapter 7 cases are typically discharged within two to six months after filing. Chapter 13 debtors must also complete their repayment plan in full in order to receive a discharge. A Chapter 7 bankruptcy typically remains on your credit report for up to 10 years after discharge. A Chapter 13 case may remain for up to seven years.