Federal law provides mechanisms to discharge debt, leaving no further legal obligations toward the creditor. This process is called bankruptcy. There are different types of bankruptcy that apply to different situations. Both a debtor and the debt in question must be eligible for discharge.
This is why it is important to select the appropriate type of bankruptcy for your particular situation. Chapter 7 bankruptcy has different requirements than Chapter 13 bankruptcy, but both can be used effectively and will legally reduce or eliminate debt.
The Differences Between Chapter 7 and Chapter 13 Bankruptcy
In Chapter 7 bankruptcy (so named because of its location within the United States Code) a debtor begins by filing a petition with the bankruptcy court. The petition contains information about the petitioner’s assets and the debt the petitioner seeks to discharge. Any asset the petitioner owns must be protected by an applicable exemption, or else it will be subject to liquidation by the bankruptcy court. Debts will also be reviewed by the bankruptcy court for eligibility. For example: family support obligations (such as alimony or child support) cannot be discharged in bankruptcy. With very limited exceptions, student loans are also not able to be discharged.
One of the most important requirements of Chapter 7 bankruptcy petition is the means test. This is a test of the petitioner’s wages and income. In order to qualify for Chapter 7 bankruptcy, the petitioner must prove that he or she is financially eligible for it and unable to make the payments required under Chapter 13 bankruptcy. Some petitioners with regular income from steady employment will not qualify for Chapter 7 bankruptcy because of the means test. When this is the case, the petitioner may still qualify for Chapter 13 bankruptcy.
Chapter 13 bankruptcy also begins with a petition filed in the bankruptcy court. The United States Courts system reports that this is sometimes called a “wage earner’s bankruptcy,” because high earners can still qualify for a discharge of debt under this Chapter. The main difference in this type of bankruptcy is that it requires partial repayment of the debt to be discharged. When the petition is filed, the court will establish a payment plan based upon the petitioner’s income. Payments are then made to the trustee and disbursed among the creditors. After successfully making payments over the set length of the payment plan (generally three to five years), the remainder of the debt can be discharged, and the debtor has no further legal obligations to the creditors.
Our South Carolina bankruptcy attorneys have helped many debtors get a fresh financial start by legally discharging their debt in Chapter 7 or Chapter 13 bankruptcy. By knowing which one is right for you, your bankruptcy can be completed faster, more efficiently, and with greater chances for a successful discharge of debt. It will also enable you to prepare for both the protection of your assets and any payment plan which might be required. This reduces the chance that a debtor will be surprised by unpleasant financial consequences.