When someone in Alabama faces overwhelming debt, he or she may decide to file for Chapter 7 or Chapter 13 bankruptcy. Both options give indebted individuals a chance at a fresh financial start.
However, they operate differently.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, or “liquidation bankruptcy,” is for individuals or businesses that have limited means and are unable to repay their debts. This is the most popular filing type, with 65% of people who file for bankruptcy filing for Chapter 7. Under this chapter, a trustee must sell non-exempt assets to pay off creditors. To file for Chapter 7, one must meet certain income requirements. The debtor’s income must either fall below the state median or the debtor must pass a means test, which evaluates disposable income, to move forward.
Chapter 7 provides a relatively quick resolution. Most unsecured debts, such as credit card balances and medical bills, undergo discharge within a few months, giving individuals a clean financial slate.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as “reorganization bankruptcy,” is for individuals with a regular income who want to create a repayment plan to settle their debts. Under Chapter 13, debtors propose a repayment plan that spans between three to five years. This plan considers disposable income, ensuring that one is able to cover his or her essential living expenses first.
Upon successfully completing the repayment plan, remaining eligible debts, such as credit card balances and medical bills, may undergo discharge.
The choice between Chapter 7 and Chapter 13 bankruptcy depends on individual circumstances. Chapter 7 offers quick debt relief but at the potential cost of losing non-exempt assets. Chapter 13 allows individuals to create a manageable repayment plan while safeguarding their assets, but it does take longer.