Qualification Requirements
Chapter 7 is likely the most well-known and sought-after form of bankruptcy. Due to its ability to eliminate debts with minimal or no expense to the debtor, this form of bankruptcy is favored by many. However, not everyone is eligible for Chapter 7 bankruptcy, and if you file without meeting the requirements, your case will be dismissed.
Chapter 7 is reserved for those who are unable to repay their debts, even over a number of years. Those in dire financial straits may benefit from Chapter 7 bankruptcy, but they must pass the means test to qualify. The means test compares an applicant's income to the state's median income level. In order to qualify for Chapter 7 bankruptcy, your income must be below the state's median income level. If your income is equal to or greater than the median income, you are ineligible for Chapter 7 and must instead petition for Chapter 13.
Administration of Debts and Assets
In Chapter 7 versus Chapter 13, debts and assets are addressed very differently. In Chapter 7 bankruptcy, debts are discharged if the creditor agrees to release you from your debt obligation or if some of your assets are liquidated to pay off creditors. Since Chapter 7 bankruptcy is not a repayment plan, creditors may be able to confiscate and liquidate assets to satisfy debts.
In Chapter 13 bankruptcy, debts are repaid over a period of three to five years through a repayment plan. As long as you make your payments on time, your assets are better protected from liquidation by creditors.
Credit Results
In the majority of instances, filing for bankruptcy can improve your credit score by removing the delinquency status from your account. However, a Chapter 7 bankruptcy will have a greater negative impact on your credit score because your debts are discharged rather than repaid. Future creditors view a Chapter 13 case more favorably because the debts were repaid.
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