Bankruptcy is not a passive process.
In fact, it requires much participation on the part of the filer.
While there isn't much variation in the amount of participation required for a Chapter 7 and Chapter 13 bankruptcy, there are some differences.
There are, however, differences in the benefits produced by a Chapter 7 versus Chapter 13 bankruptcy.
Chapter 7 The first step in filing a Chapter 7 case is passing a means test.
This test is used to compare the debtor's income level to the median level of the state of residence.
In order to qualify for a Chapter 7 bankruptcy, the debtor's income must be less than the median income level of the state in which they are filing.
The means test is the most crucial part of the Chapter 7 case because it determines who is eligible to file and who is not.
Although it does not require much participation from the filer, the means test does require that income and employment information be provided in order for the test to be completed.
The remaining steps involved in a Chapter 7 case are similar to those of a Chapter 13 case.
The benefits of Chapter 7 may vary between cases, but generally follow a similar pattern.
Perhaps the most important benefit of a Chapter 7 case is the debt elimination factor, in which one can be completely freed of most of their debts.
Not only will debts be eliminated, but the filer may not even be required to pay anything.
However, there are cases in which some assets may be given up to satisfy debts.
A Chapter 7 case can eliminate nearly 100 percent of unsecured debts and even some secured debts.
Chapter 7 can be highly beneficial to those who accumulated debts before a divorce, whose spouse is now deceased or who suffered a medical condition that resulted in a high debt burden.
Chapter 13 Qualifying for Chapter 13 is fairly easy and does not require the passing of a means test.
Initiating the process is a simple as completing the bankruptcy petition and filing it with the court, generally the second step after passing a means test for Chapter 7 cases.
Another step required in both Chapter 7 and 13 is the completion of a credit counseling course.
This course is required by the court to help educate filers about money management, debt resolution options and using credit wisely.
Failing to complete the credit counseling requirement is one of the biggest reasons people end up with their case being dismissed by the court.
Debtors must also pay the necessary fees in both 7 and 13 cases, yet another reason for case dismissal.
Many people will suggest that Chapter 13 is more beneficial than a Chapter 7 case, but that really depends on the financial situation of the filer.
In general, a Chapter 13 case will result in less credit damage since the debts are being repaid rather than eliminated.
It can also be more beneficial for those who hold jointly held debts or debts on a co-signed loan, both of which could unnecessarily hurt the credit of the other party in a Chapter 7 case.