How do Chapter 7 bankruptcy and Chapter 13 bankruptcy differ?

Chapter 7 bankruptcy and Chapter 13 bankruptcy differ in the way that they address debt, treat personal assets and assess the eligibility of consumers.

Each year, thousands of people in Miami and other nearby areas seek relief from debt by filing bankruptcy. In 2015 alone, 22,406 bankruptcy filings were reported in the U.S. Bankruptcy Court of the Southeastern District of Florida. Data from the same source shows that the majority of these filings were for Chapter 7 or Chapter 13 bankruptcy.

For many people in Florida, filing bankruptcy under either chapter may offer a path to debt relief. However, there are significant legal differences between the two chapters, and it is essential for consumers to understand these differences before deciding which chapter to file bankruptcy under.

Method of addressing debt

The chapter of bankruptcy that a person files determines how his or her liabilities will be resolved. Under the U.S. Bankruptcy Code, people who file Chapter 13 bankruptcy must enter into a court-approved plan to make payments toward their debts over a period of three to five years. Certain debts may be eligible for discharge at the end of this plan. In Chapter 7 bankruptcy, consumers don't have to complete a repayment plan to qualify for debt discharge.

Treatment of personal assets

The potential for personal property loss represents a significant difference between Chapter 7 and Chapter 13 bankruptcy. Consumers who file Chapter 13 bankruptcy may keep their property if they observe the terms of the repayment plan. In contrast, people who file Chapter 7 bankruptcy may lose various assets, unless those assets qualify as exempt from liquidation. Consumers in Florida must use the state exemptions, which can protect various assets, including the following:

  • Recent wages earned by a head of household
  • The value of the consumer's house
  • Items of personal property, such as electronics and furniture

Consumers also may have the option of keeping their secured assets by "reaffirming" the associated debt with a creditor. This agreement stipulates that the consumer may maintain possession of a secured item if he or she pays the creditor for a specified amount of its full value.

Eligibility criteria

Consumers also must meet different requirements to qualify to file Chapter 7 or Chapter 13 bankruptcy. Under the U.S. Bankruptcy Code, filing Chapter 13 bankruptcy is only an option for people with unsecured debts of less than $383,175 and secured debts worth less than $1,149,525. These individuals also must have adequate income to support a repayment plan. People who are considering filing Chapter 7 bankruptcy, meanwhile, must complete a bankruptcy means test.

This test first evaluates whether a consumer's monthly income exceeds the state median. If so, the ratio of the consumer's income to non-priority secured debts is considered, as is the consumer's average monthly income over the past five years. If the ratio exceeds 25 percent, or if the average monthly income less certain expenses surpasses $12,475, the filing may be dismissed or converted to a Chapter 13 bankruptcy filing. Consumers may challenge these actions, however, by showing that they face special circumstances.

Selecting a suitable chapter

In some cases, these distinctions may effectively decide which chapter of bankruptcy a person can file. However, many people may qualify to seek debt relief under either chapter, which makes a careful consideration of the merits of both important. For further advice, people considering filing bankruptcy in Florida may benefit from consulting with an attorney. An attorney may be able to offer advice on choosing an appropriate chapter, given a person's long-term goals and current financial situation.