Filing for Chapter 7 vs. Chapter 13 in Massachusetts Bankruptcy

When faced with overwhelming debt, many individuals in Massachusetts consider filing for bankruptcy as a means of seeking relief. The two most common types of bankruptcy filings are Chapter 7 and Chapter 13. Each option has its own set of advantages and disadvantages, and understanding these differences is essential for making an informed decision.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," allows individuals to discharge most of their unsecured debts, such as credit card debt and medical bills. In this process, a bankruptcy trustee is appointed to oversee your case, which may involve selling non-exempt assets to repay creditors. However, many individuals in Massachusetts find that they can keep their essential assets, such as their home and car, by qualifying for specific exemptions.

Qualifying for Chapter 7

To qualify for Chapter 7 bankruptcy in Massachusetts, you must pass the means test, which compares your income to the median income for a household of your size in the state. If your income is below the median, you may be eligible to file. If not, you may need to consider Chapter 13.

Advantages of Chapter 7

Quick Process: Chapter 7 cases are generally resolved within three to six months.
Discharge of Most Unsecured Debts: This option can result in significant debt relief, allowing you a fresh start.
No Repayment Plan: Unlike Chapter 13, you are not required to create a repayment plan.

Disadvantages of Chapter 7

Asset Liquidation: You may have to sell some assets to repay creditors, though many exemptions exist.
Impact on Credit: A Chapter 7 filing remains on your credit report for up to ten years.
Eligibility Requirements: Not all individuals qualify, especially if you have significant disposable income.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, on the other hand, is often called "reorganization bankruptcy." It allows individuals with a steady income to keep their assets while repaying a portion of their debts over a three to five-year period. Under this plan, you propose a repayment schedule to the bankruptcy court, which creditors must adhere to.

Qualifying for Chapter 13

To qualify for Chapter 13 bankruptcy in Massachusetts, you must have a regular income and unsecured debts below $465,275 and secured debts below $1,395,875 (as of 2023). This makes it a viable option for many individuals seeking debt relief while keeping their property.

Advantages of Chapter 13

Retention of Assets: You can keep your assets, including your home, while repaying debts.
Cure Mortgage Defaults: If you are behind on mortgage payments, Chapter 13 allows you to bring your mortgage current while preventing foreclosure.
Flexible Repayment Plans: You can create a payment plan that works for your financial situation.

Disadvantages of Chapter 13

Lengthy Process: Chapter 13 can take three to five years to complete.
Regular Payments Required: You must make consistent monthly payments to the bankruptcy trustee during the repayment period.
Credit Impact: While less severe than Chapter 7, a Chapter 13 filing still reflects on your credit report for up to seven years.

Choosing Between Chapter 7 and Chapter 13

The decision between Chapter 7 and Chapter 13 ultimately depends on your financial situation, needs, and goals. If you require immediate debt relief and have limited disposable income, Chapter 7 may be the best option for you. Conversely, if you have a steady income and want to keep your assets, Chapter 13 may be more suitable.

Consulting with a qualified bankruptcy attorney in Massachusetts can help guide you through this process. They can assess your financial situation and help determine which type of bankruptcy is most appropriate for your circumstances.

Ultimately, both Chapter 7 and Chapter 13 serve as valuable tools for individuals seeking to regain financial stability. Understanding the differences between the two can empower you to take the necessary steps towards a brighter financial future.