Bankruptcy is the legal provision that allows individuals and corporations to alleviate their debts. While the technicalities of each bankruptcy ‘chapter’ are beyond the scope of this article, we will go over the basics of Chapter 7 bankruptcy and see how it differs from Chapter 13.
Chapter 7 Bankruptcy
This is the most common of bankruptcy filings in the U.S. Chapter 7 is also known as ‘liquidation’ bankruptcy because the trustee can sell off your non-exempt assets to pay back your ‘unsecured’ debts, i.e. your liabilities for which no collateral has been pledged. For instance, in a car loan, the car itself can be the collateral. This debt will not be written off, and the petitioner can either forfeit the asset, or pay a settlement amount.
As of 2005, you can only be eligible for this chapter if your income is lower than the median income of a median household in your state of residence. If it is higher, you will have to pass the ‘means test’, whereby the court sees whether you have enough disposable income to repay at least a portion of your unsecured debts over a 5 year repayment period.
Your petition can be dismissed or discharge may not be granted typically if:
- You received a Chapter 7 discharge in the last 8 years.
- Another bankruptcy petition was dismissed in the last 180 days.
- You were shown to be dishonest.
Differences with Chapter 13
Chapter 7 and Chapter 13 bankruptcy differ in many ways. For instance, there is no repayment period under Chapter 7 but in Chapter 13, it is 3-5 years. Finally, your unsecured debts should be below $360,475 and secured debts should be less than $1,081,400 if you want to qualify to file for Chapter 13 bankruptcy. No such requirement exists for a Chapter 7 Filing.