Key Differences Between Chapter 7 and Chapter 13 Bankruptcy in Utah

Bankruptcy can be a crucial financial relief option for individuals facing overwhelming debt. In Utah, the two most common types of bankruptcy filings for individuals are Chapter 7 and Chapter 13. Each serves a different purpose and has different implications for debtors. Understanding the key differences between Chapter 7 and Chapter 13 bankruptcy in Utah is essential for making an informed decision.

1. Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is designed for individuals who cannot repay their debts. This type of bankruptcy involves the sale of non-exempt assets to pay off creditors. The process typically takes about three to six months from filing to discharge.

Eligibility for Chapter 7

To qualify for Chapter 7 bankruptcy in Utah, individuals must pass the means test, which assesses their income and expenses. If the individual's income is below the state median income for their household size, they generally qualify for Chapter 7. If it is above, further calculations are required to determine eligibility.

2. Overview of Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as "reorganization bankruptcy," allows individuals with a regular income to develop a repayment plan to pay off their debts over three to five years. This option is suitable for those who wish to keep their assets and are capable of making monthly payments toward their debts.

Eligibility for Chapter 13

To file for Chapter 13 bankruptcy in Utah, individuals must have a regular income and their secured and unsecured debts must be below certain limits set by the federal government. Additionally, individuals must complete credit counseling before filing.

3. Impact on Assets

One of the main differences between Chapter 7 and Chapter 13 bankruptcy is how they affect assets. In Chapter 7, non-exempt assets may be liquidated to repay creditors, potentially resulting in the loss of property. However, many exemptions allow individuals to retain necessary assets such as a portion of home equity, vehicles, and personal belongings.

In contrast, Chapter 13 allows individuals to keep all their property while repaying debts through a court-approved plan. This is particularly advantageous for those who want to preserve their home and avoid foreclosure.

4. Length of the Bankruptcy Process

Chapter 7 is generally quicker to resolve, with most cases concluding within a few months. In contrast, Chapter 13 involves a longer commitment, typically lasting three to five years as debtors make monthly payments according to their repayment plan.

5. Discharge of Debts

Both Chapter 7 and Chapter 13 result in the discharge of certain debts. In Chapter 7, most unsecured debts, like credit card debt and medical bills, can be discharged shortly after the bankruptcy is complete. In Chapter 13, individuals may discharge some unsecured debts after successfully completing their repayment plan, which makes it a more gradual process.

6. Credit Impact

Filing for either Chapter 7 or Chapter 13 bankruptcy negatively affects credit scores. Chapter 7 can remain on a credit report for 10 years, while Chapter 13 lasts for 7 years. However, individuals may find it easier to rebuild their credit after completing Chapter 13 due to the structured repayment plan.

7. Conclusion

The choice between Chapter 7 and Chapter 13 bankruptcy in Utah largely depends on individual financial circumstances, including income, assets, and the desire to keep property. Understanding these key differences can help individuals make informed decisions about their financial future.