When it comes to bankruptcy, consumers have several options depending on their financial situation and goals. The most common types are Chapter 7 and Chapter 13, but there is also a strategy sometimes referred to as Chapter 20, which combines the benefits of both.

Chapter 7 Bankruptcy: “Liquidation”

  • What it is: Chapter 7 involves the liquidation of non-exempt assets to pay off unsecured creditors. If you have non-exempt property, it can be sold by the bankruptcy trustee to satisfy your debts.
  • Who qualifies:
    • Income limits: Your eligibility is determined by the median income for your state and family size. If your income is below this threshold, you can generally file for Chapter 7. If it’s above the median, you must pass a means test to prove you do not have sufficient disposable income to repay your creditors.
  • Advantages:
    • Quick relief: Chapter 7 cases typically last about 4 to 6 months, discharging most unsecured debts (like credit card debt, medical bills, etc.).
    • No repayment plan: You are not required to repay your creditors; it’s a fresh start after liquidating assets.
  • Limitations:
    • You may lose or have to pay the trustee to keep non-exempt property.
    • Not all debts (like student loans or certain taxes) are dischargeable in Chapter 7.

Chapter 13 Bankruptcy: “Reorganization”

  • What it is: Chapter 13 is a repayment plan that allows you to reorganize your debt. Instead of liquidating assets, you will make monthly payments to a bankruptcy trustee, who distributes them to creditors over 3 to 5 years.
  • Who qualifies:
    • Income requirements: Your must have a regular source of income to make your monthly plan payment and you must still meet debt limits for secured and unsecured debts.
    • Debt limits: There are limits on the amount of debt you can have to qualify for Chapter 13. If you exceed these limits, you may not be eligible for this option.
  • Advantages:
    • Retention of property: You can keep your property, including a home or car, if you can make the payments under the plan.
    • Catching up on payments: It can help you catch up on delinquent mortgage or car payments.
  • Limitations:
    • You must make regular monthly payments for several years.
    • You cannot discharge all types of debt (like student loans or or child support).

Chapter 20 Bankruptcy: A Combination of Chapter 7 and Chapter 13

  • What it is: While Chapter 20 is not an official chapter in the bankruptcy code, it refers to a two-step process where a consumer files a Chapter 7 first to eliminate unsecured debt, then files a Chapter 13 to handle secured debt and catch up on any overdue payments (like mortgage or car loans).
  • Why use it:
    • Discharge of unsecured debt: You first eliminate unsecured debt, such as credit card bills or medical expenses, through Chapter 7.
    • Protection for secured debt: After the Chapter 7 discharge, you can file Chapter 13 to catch up on missed payments or get court protection for secured debt (e.g., mortgage, car loan, taxes).
  • Eligibility: This strategy is especially useful if you are behind on mortgage payments and want to protect your home, or if you need protection from tax creditors or student loans.
  • Limitations:
    • You won’t receive a discharge of debts in Chapter 13 if you file within 4 years of a prior Chapter 7 discharge.
    • This strategy requires a lot of planning.

Which Bankruptcy Option Is Right for You?

  • Chapter 7 is often the best choice if:
    • You have primarily unsecured debt (e.g., credit cards, medical bills).
    • Your income is below the median for your state.
    • You have limited assets and want a quick discharge.
  • Chapter 13 might be ideal if:
    • You are behind on mortgage or car payments and want to keep your property.
    • You have a higher income or need a longer period to repay debts.
    • You are facing foreclosure or car repossession.
  • Chapter 20 could be a good option if:
    • You’ve filed a Chapter 7 and now need help with secured debt or catching up on mortgage payments.
    • You’re looking for protection from tax debts or student loans.

Key Takeaway:

There are multiple bankruptcy options available depending on your situation, and you don’t have to feel stuck with only one choice. It’s essential to understand the differences between Chapter 7, Chapter 13, and Chapter 20 to make the best decision for your financial recovery. Consult with our office to explore which path suits your needs and goals for a fresh financial start.