Many families are struggling with debt. Financial problems remain the number one stressor for people nationwide. The American Bankruptcy Institute (ABI) reports that there were 1,611 consumer bankruptcy filings in West Virginia in 2021. Another 8,078 consumer bankruptcies were filed in Maryland. There are actually two different types of personal bankruptcy:
- Chapter 7 bankruptcy
- Chapter 13 bankruptcy.
If you or your loved one is considering filing for bankruptcy protection, it is imperative that you understand the difference between the two. At Hinkle Law, PLLC, we want to make sure you have the tools and knowledge you need to protect your financial interests. In this article, you will find an overview of what you should know about the differences between Chapter 7 and Chapter 13.
Difference: Liquidation (Chapter 7) vs. Restructuring (Chapter 13)
Chapter 7 bankruptcy is a liquidation bankruptcy. Chapter 13 bankruptcy is a restructuring bankruptcy. This is the most important difference between the two types of personal bankruptcy. With a Chapter 7 bankruptcy filing, you can get qualifying debts—credit cards, personal loans, medical bills, etc.—discharged outright. When you complete the process, these qualifying debts will be forgiven.
In contrast, a Chapter 13 bankruptcy involves a restructuring of your debts. Instead of an immediate discharge, your qualifying debts will be rolled into a payment plan. A Chapter 13 payment plan cannot last for more than five years. When all payments are complete, any remaining debt will then be discharged. Notably, a Chapter 13 payment plan can dramatically reduce monthly payments—often it will eliminate interest, fees, penalties, and even some of the principal.
Difference: Restricted (Chapter 7) vs. Open (Chapter 13)
Another key difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy is the “openness” of the process. Unfortunately, not everyone is eligible to file for Chapter 7 bankruptcy protection. In 2005, federal lawmakers passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Along with other things, this federal act created a so-called “means-test” for Chapter 7 bankruptcy. In effect, the means test holds that people can only file for Chapter 7 bankruptcy protection if the household-adjusted income is below the median for their state. Here is an overview of the Chapter 7 income limits for all bankruptcy cases filed after May 1st, 2022:
- Household of 1: $50,855 in West Virginia, $71,839 in Maryland.
- Household of 2: $55,518 in West Virginia, $94,405 in Maryland.
- Household of 3: $68,537 in West Virginia, $108,879 in Maryland.
- Household of 4: $74,508 in West Virginia, $131,859 in Maryland.
- Household of 5: $83,508 in West Virginia, $140,859 in Maryland.
You may still be eligible to file for Chapter 7 bankruptcy if your income is somewhat higher than the listed statutory limit. The reason being is that you could potentially have expenses that can be “excluded” from the Chapter 7 means test calculation. Notably, Chapter 13 bankruptcy is different. The means test does not apply. In other words, Chapter 13 bankruptcy is a largely open process. Whereas some higher-income people and families with financial distress are not eligible to file for Chapter 7 bankruptcy, Chapter 13 bankruptcy remains an option.
Difference: 10 Years on Credit Report (Chapter 7) vs. 7 Years on Credit Report (Chapter 13)
There is a cost to file for bankruptcy. As you are undoubtedly already aware, a bankruptcy filing is viewed as adverse information on your credit report. Your bankruptcy filing will appear when someone pulls your credit report—at least for a certain period of time. How long a bankruptcy stays on your credit report depends on the types of bankruptcy protection that you pursue. As explained by the national credit reporting agency Transunion, federal law holds that:
- A Chapter 7 bankruptcy filing will remain on your credit report for ten years; and
- A Chapter 13 bankruptcy filing will remain on your credit report for seven years.
After the requisite amount of time has passed, a bankruptcy filing will roll off your credit report. Although a bankruptcy is certainly unfavorable information on a credit report, the adverse impact that it will have does diminish over time. You can start repairing your credit score immediately after a bankruptcy filing. Our law firm puts a strong emphasis on helping clients rebuild their credit after bankruptcy.
Similarity: The Goal is to Resolve Debt and Achieve Long-Term Financial Stability
Chapter 7 bankruptcy and Chapter 13 bankruptcy are both legal tools. An important similarity between Chapter 7 bankruptcy and Chapter 13 bankruptcy is that the fundamental goal is the same. Regardless of what type of personal bankruptcy you file for, the central purpose is still to resolve your debt problems and get you into a sustainable long-term financial position. A bankruptcy filing is only effective if it actually provides an answer. Among other things, this means exiting the personal bankruptcy process in a stronger and more stable financial position.
Similarity: A Complicated Process—a Bankruptcy Attorney Can Help
Dealing with debt is stressful. Getting rid of overly burdensome debt can be a confusing, even overwhelming process. Whether you are considering Chapter 7 bankruptcy, Chapter 13 bankruptcy, or a non-bankruptcy debt relief alternative, an experienced Martinsburg bankruptcy attorney can help you determine the proper course of action. You do not have to handle the entire situation on your own.
Ultimately, debt is merely a problem to be solved. While it is common to do so, no one should view debt as a failure or a source of shame. An experienced bankruptcy law & debt relief lawyer can answer your questions, help you evaluate all potential options, and devise a strategy that helps you secure a better financial future.
Schedule a Free, Fully Confidential Consultation With a Personal Bankruptcy Lawyer
At Hinkle Law, PLLC, we have helped thousands of people get relief from millions of dollars in debt. No matter your current financial circumstances, there is always a path to a better and more stable tomorrow. If you have any questions about Chapter 7 bankruptcy, Chapter 13 bankruptcy, or your debt relief options more generally, we are more than happy to help. Contact us today to set up a no-cost, completely private initial appointment with an attorney. From our Martinsburg, WV law office, we provide personal bankruptcy representation in West Virginia and Western Maryland.