How do Chapter 7 and Chapter 13 bankruptcy differ?

Chapter 7 and Chapter 13 bankruptcy vary in their eligibility criteria, manner of addressing debt and treatment of a consumer’s personal assets.

In 2015, the majority of Nevada residents who sought debt relief through bankruptcy filed under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. According to the U.S. Bankruptcy Court District of Nevada, out of 8,871 filings, 8,728 were Chapter 7 or Chapter 13 cases. Many people who are now considering filing bankruptcy in Las Vegas may be similarly choosing between these two widely used options. For these individuals, knowing the key differences between Chapters 7 and 13 bankruptcy is an essential starting point.

Method of managing debt

Chapter 7 and Chapter 13 bankruptcy allow consumers to manage their debt in distinct ways. During Chapter 7 bankruptcy, an individual's property is liquidated in order to pay off as much debt as possible. This process may be completed in a matter of months. In contrast, during Chapter 13 bankruptcy, consumers have the chance to enter into debt repayment plans that last up to five years. At the end of either process, a person's qualifying remaining debts may be fully discharged.

Disposition of personal property

The way that a consumer's personal assets are treated also varies based on the chapter of bankruptcy that he or she files. A person who files Chapter 13 bankruptcy can keep all property, including secured assets, as long as she or he keeps current on payments toward those assets. During Chapter 7 bankruptcy, in contrast, consumers lose all personal property except for assets that are deemed exempt. In Nevada, consumers may exempt a set value of the following assets from liquidation:

• Personal residences

• Material possessions, including vehicles

• Insurance policies or proceeds

• Pensions

Federal law also establishes exemptions that consumers may claim during Chapter 7 bankruptcy. However, people who are seeking debt relief by filing bankruptcy in Nevada are required to use the state's exemptions, rather than the federal ones.

Eligibility requirements

People who wish to file Chapter 7 bankruptcy must first pass a "means test." This test compares whether a person's monthly income falls below the median income for a Nevada household of comparable size. If so, the person is eligible to file under Chapter 7. A person whose income exceeds the state median may still qualify for Chapter 7 bankruptcy by documenting his or her income and debts. However, people with higher amounts of income may be required to file Chapter 13 bankruptcy.

To qualify for Chapter 13 bankruptcy, consumers need to meet a few requirements. First, they must have enough disposable income to support a court-approved repayment plan. Additionally, under federal law, people filing Chapter 13 bankruptcy cannot possess secured debts worth more than $1,149,125 or unsecured debts worth more than $383,175.

Assessing each option

Given the many differences between Chapter 7 and Chapter 13 bankruptcy, people who are considering seeking debt relief under either chapter may benefit from consulting with a bankruptcy attorney. An attorney may be able to help a person evaluate the merits of each option and navigate the complicated bankruptcy filing process.