Comparing Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy in Chicago, Illinois

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy: A Few Key Differences

1. Method to Relieve Debt: Chapter 7 Liquidation Vs. Chapter 13 Payment Plan:

In both cases relieving debt is the goal, and following a means test (that determines eligibility), people who qualify may be eligible for either Chapter 7 Bankruptcy, which offers a straight liquidation of assets, or Chapter 13 Bankruptcy, which uses a payment plan for people with a regular source of income.

In Chapter 7, all non-exempt assets are surrendered for liquidation and distribution to creditors. The case is opened and closed within 3 to 6 months, and you ultimately emerge debt-free except for a mortgage, car payments, and certain other types of debts, such as student loans, recent taxes, and unpaid child support. Then the money from liquidation is split among your creditors, according to priority established by the Bankruptcy Code.

In Chapter 13, you file bankruptcy petition and proposed payment plan with court, which typically provides interest-free payments over a 3 to 5 year period. Payments are made from remaining disposable income, which allows you to retain your assets.

2. Eligibility Limitations

Your eligibility for either Chapter 7 or Chapter 13 is determined by a bankruptcy "means test", which evaluates your income in comparison to the Illinois average. Generally, your financial situation must be tenuous at best to be eligible for Chapter 7, as the means test formula is designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. If you’ve lost your job, or are underemployed or employed part-time and have significant debt issues, Chapter 7 may be for you.

High income filers who fail the means test are still able to use Chapter 13 bankruptcy to repay a portion of their debts, but can’t use Chapter 7 bankruptcy to wipe out their debts altogether. With Chapter 13 the standards are a bit more rigorous, and you must have steady employment and enough income coming in to make the necessary payments towards your debt for the next few years.

A Chicago bankruptcy attorney can help you determine your eligibility and explore your options with you.

3. The Effect on your Credit:

After a Chapter 7 Bankruptcy, a record remains on your credit record for up to ten years from the date of filing. In Chapter 13 Bankruptcy, the record may remain on your credit report for up to ten years from the date of filing, although some creditors will report a Chapter 13 bankruptcy for only seven years. The reason for this is that a lender looking at your report may see Chapter 13 as a more responsible way to handle your debt, because you made a good faith effort to repay your debts despite your financial hardship.

In each case, you’ll be required to undergo some credit counseling, which will help you get a better understanding of the best ways to maintain financial stability.

4. Filing Frequency:

If you previously filed a Chapter 7 case and got a discharge, then you have to wait eight years before you can file another Chapter 7 Bankruptcy. If you previously filed a Chapter 13 and received a discharge, then you only have to wait four years to file a Chapter 7 Bankruptcy. Furthermore, a Chapter 13 discharge won’t be granted if you received discharge in Chapter 7, 11, or 12 four years earlier or more or a previous Chapter 13 discharge two years before.

5. Keeping Your Chicago Home:

In both cases, you’ve got to keep up with mortgage payments if you want to keep your home. If you do, your home may be preserved under homestead exemption if there is not substantial non-exempt equity. A Chicago Chapter 7 Bankruptcy lawyer can help negotiate an agreement with your lien holders where you continue to make payments in exchange for keeping your property.

With Chapter 13, your home may be saved from foreclosure if the payment plan is successfully completed and if there is not substantial non-exempt equity. Furthermore, when you file a Chapter 13 Bankruptcy petition, all foreclosure proceedings will stop until your Chapter 13 repayment plan is approved by the court. This is called the "automatic stay." Under most circumstances, once the plan is approved by the bankruptcy judge, the lender is bound by the plan and cannot continue with the foreclosure, assuming you make your bankruptcy plan payments.