Chapter 7 vs. Chapter 13 Bankruptcy in Phoenix
Which Bankruptcy Option Is Best for You?
If you are faced with overwhelming debt, bankruptcy may be the right choice. Eligible individuals may file for either Chapter 7 or Chapter 13 bankruptcy. Our experienced Phoenix bankruptcy attorneys can provide sound legal guidance on every aspect of bankruptcy and help you determine whether Chapter 7 or Chapter 13 is the best choice for you.
What Is Chapter 7 Bankruptcy?
Chapter 7 is a type of bankruptcy that does not require a plan of repayment. When you file for Chapter 7, an automatic stay stops most collection actions against you. The bankruptcy trustee gathers and sells your nonexempt assets and uses the proceeds to pay creditors. You are allowed to keep certain exempt personal properties, including household items, clothing, books, medical health equipment, the tools of your trade, your home and a vehicle valued at up to a certain amount. Unsecured debts, such as credit card balances and medical bills are discharged in Chapter.
What Are the Eligibility Requirements for Chapter 7?
To be eligible to file for Chapter 7, your disposable income must be under a certain amount. If your current monthly income exceeds the state median, a “means test” must be applied. The purpose is to determine whether granting you relief would be an abuse of Chapter 7. The means test is a calculation that compares your household income to the median for your state and accounts for your expenses. If the test reveals that you do not have enough disposable income to pay at least 25% of your unsecured nonpriority debts over a five-year period, you are eligible for Chapter 7.
What Are the Pros and Cons of Chapter 7?
- The main advantage of filing for Chapter 7 is that it provides relief from unsecured debts and gives you a fresh start. Most unsecured debt can be discharged. It automatically stops collection actions, including repossession, wage garnishment, lawsuits, and harassing phone calls. It allows you to keep certain exempt property considered necessary for life.
- The main disadvantage of Chapter 7 is that it is reflected on your credit report for up to 10 years. It will not discharge certain debts, such as child support, alimony, tax liens, and student loans. In addition, you will lose any property that is not exempt under the Bankruptcy Code.
What Is Chapter 13 Bankruptcy and Who Is Eligible?
Chapter 13 is also known as a wage earner’s plan. It allows individuals with regular income to create a plan for full or partial repayment to creditors in installments over a three-to-five-year period. Once the plan is complete, the remaining debt is discharged.
Individuals with too much income to qualify for Chapter 7 can file for Chapter 13. You are eligible to file if the combined total of your secured and unsecured debts is less than $2,750,000 as of the date of filing.
Chapter 13 gives you more time to pay off your debts and flexibility on the terms of payment. Once you complete your repayment plan, you are not obligated to pay individual creditors in full, and you get to keep the property on which you are making payments. The main disadvantages of Chapter 13 are:
- It can take up to five years to repay your debts.
- It stays on your credit report for up to 10 years.
- You will lose your credit cards.
- You may not be able to get a mortgage loan.
There are pros and cons with both Chapter 7 and Chapter 13 bankruptcy. Our experienced bankruptcy lawyers at Hilltop Law Firm can help you determine which debt relief solution is best for you. Contact us at (602) 466-9631 to schedule a consultation.