Filing for bankruptcy is an effective way to eliminate debt, but the process isn’t always clear. This is why hiring a bankruptcy lawyer to guide you through it is important, starting by determining which chapter is right for you. It’s helpful to learn the differences between the two first.
Chapter 7 bankruptcy is considered liquidation since it involves selling certain assets to pay off as much debt as possible. Once your trustee has liquidated eligible assets and given the money to creditors, your unsecured debts will be discharged. On the other hand, Chapter 13 allows you to reorganize your financial situation and create a payment plan that guides you in repaying your debts. Take a look at what else you should know about Chapter 7 vs. Chapter 13 before you file.
How Does Chapter 7 Bankruptcy Work?
If selling assets to discharge your debts appeals to you, Chapter 7 bankruptcy might be your preference. However, not everyone is eligible for this option. You must pass a means test to ensure your income is not too high. Your most recent income has to be lower than the median annual income for a South Carolina family the same size as yours. To determine this, you’ll review your gross income from the last six months and double it to get your annual income. If it’s lower than the state’s median income, you qualify for Chapter 7 bankruptcy.
If it’s slightly higher, you need to take another means test where you subtract certain necessary expenses. If you don’t have enough left after that to make payments to creditors, you might qualify for Chapter 7 bankruptcy. But if you have money left over, you might have to pursue Chapter 13 bankruptcy instead. Your lawyer will advise you on this step.
If you’re eligible for Chapter 7, you can get unsecured debts discharged, such as medical bills, credit card debt, and personal loans. When you file, you will be assigned a trustee who will look at your assets and determine which are exempt, meaning you can keep them. Exempt assets typically include your primary home, a car, and household goods. If you have valuable assets you don’t need, they may be non-exempt, and the trustee will sell them to pay creditors. Your debts are discharged at that point, and your creditors cannot request more money from you.
How Does Chapter 13 Work?
If you have the funds to pay creditors, Chapter 13 bankruptcy is ideal. If you file this chapter, you will not have to sell your assets to get unsecured debts discharged. However, you must repay some of your debts in the next few years.
An important part of this chapter is the repayment plan, which outlines how much money you will send each creditor monthly for three to five years. Your lawyer will help you determine this, and then a judge in the bankruptcy court will have to approve your plan. Once they do, the trustee for your case will begin sending payments to creditors for the agreed-upon number of years. After the plan ends, the debts that were part of the repayment plan will be considered paid, and your creditors cannot contact you again.
What Should You Know Before Filing for Bankruptcy?
In short, Chapter 7 is available to debtors who don’t have a regular source of income sufficient to make payments to creditors, while Chapter 13 is ideal for debtors who have a steady income and don’t want to lose assets. Your lawyer will help decide which one is best for you.
Keep in mind that not all debts are dischargeable. Even if you declare bankruptcy, you’ll have to pay alimony, child support, most student loans, taxes, and court-ordered payments due to lawsuits or criminal charges. Also, bankruptcy will affect your credit report for several years. Chapter 7 stays on your report for up to ten years, while Chapter 13 stays on it for seven years.
However, most debtors can gradually rebuild their credit score in the years following bankruptcy once they’re not in debt anymore. If you have questions about whether to file Chapter 7 or 13 in South Carolina, call The Howze Law Firm LLC at 803-266-1812.