How Do You Calculate Your Disposable Income for Chapter 7 Bankruptcy?

Chapter 7 and Chapter 13 are two different types of bankruptcy filings in the United States, each with its own set of rules and implications. The key differences between Chapter 7 and Chapter 13 bankruptcy include:

  1. Eligibility:
  • Chapter 7: This form of bankruptcy is typically available to individuals and businesses with limited income and assets. To qualify for Chapter 7, you must pass the means test, which assesses your income and expenses to determine your eligibility.
  • Chapter 13: Chapter 13 is often referred to as the “wage earner’s” or “reorganization” bankruptcy. It is available to individuals with a steady source of income, allowing them to create a repayment plan to address their debts over a period of 3 to 5 years.
  1. Discharge vs. Repayment:
  • Chapter 7: In a Chapter 7 bankruptcy, most unsecured debts, such as credit card debts and medical bills, are typically discharged, meaning you are no longer legally obligated to repay them. However, some assets may be sold to pay off creditors.
  • Chapter 13: Chapter 13 involves creating a court-approved repayment plan to pay off a portion of your debts over a period of 3 to 5 years. After successfully completing the plan, any remaining eligible debts may be discharged.
  1. Asset Protection:
  • Chapter 7: In Chapter 7, a bankruptcy trustee may sell non-exempt assets to repay your creditors. However, most states offer exemptions that protect essential assets like your primary residence, car, and personal belongings up to certain limits.
  • Chapter 13: Chapter 13 allows you to keep your assets, even non-exempt ones, as long as you stick to the repayment plan and continue to make payments.
  1. Duration:
  • Chapter 7: Chapter 7 bankruptcies are typically faster and can be completed in a few months.
  • Chapter 13: Chapter 13 bankruptcies usually last for 3 to 5 years, as you’re required to make regular payments according to the repayment plan.
  1. Impact on Credit:
  • Both Chapter 7 and Chapter 13 bankruptcies will have a negative impact on your credit score. A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy typically remains for 7 years.
  1. Mortgage and Foreclosure:
  • Chapter 7: If you’re behind on your mortgage payments, Chapter 7 bankruptcy may temporarily delay foreclosure but won’t necessarily save your home in the long term.
  • Chapter 13: Chapter 13 allows you to catch up on past-due mortgage payments over time, potentially preventing foreclosure and allowing you to keep your home.
  1. Co-Signer Protection:
  • Chapter 7: Chapter 7 does not protect co-signers, and creditors can pursue them for the full debt.
  • Chapter 13: Chapter 13 can provide protection for co-signers by including the debt in the repayment plan.

It’s essential to consult with an experienced bankruptcy attorney to determine which chapter is most suitable for your specific financial situation, as bankruptcy laws are complex and can vary from state to state. Your attorney can help you understand the implications of each type of bankruptcy and guide you through the process.

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