Chapter 7 vs. 13 Bankruptcy in Ohio – Understanding the Differences with Examples
Chapter 7 offers a fresh start through total debt liquidation. It allows you to eliminate unsecured debts while keeping essential assets like your home and car. Non-dischargeable debts include:
- Recent taxes (less than 3 years old)
- Alimony and child support
- Criminal penalties
- Intentional tort damages
Example: Sally, a single mother making $42,000 annually with two children, qualifies for Chapter 7. She’s currently on her house and car payments with no tax liability but has $40,000 in miscellaneous debt. Through Chapter 7, she maintains her assets while eliminating her debt.
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Understanding Chapter 13 Bankruptcy
Chapter 13 creates a structured 3-5 year repayment plan. It’s designed for two scenarios:
- Income exceeds Chapter 7 qualification limits
- Need to save assets from foreclosure or repossession
Through Chapter 13, you make one monthly payment to a trustee who distributes funds to creditors. Unsecured creditors may receive as little as one penny on the dollar.
Example: John, earning $90,000 annually with a family of three, requires Chapter 13. He’s two months behind on his mortgage but current on his car payment, with $50,000 in debt. His plan consolidates his mortgage arrears, current mortgage payments, and car payments into one trustee payment. His unsecured debts will be settled for approximately 5 cents on the dollar.
Similar to having a bill-pay service, your payments go to a Chapter 13 Trustee who handles disbursement to all creditors. This simplifies your financial management and ensures proper distribution of payments.
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Understanding the Means Test
The decision often comes down to passing a Means Test – a government calculation based on your income and IRS-created living expenditures for your family size. This test determines whether you qualify for Chapter 7 or must pursue Chapter 13.
Related Blog: What is the Means Test and How Does it Work in Ohio?
In Closing
Choosing between Chapter 7 and Chapter 13 bankruptcy depends on your income level, asset status, and financial goals. Consulting with an experienced bankruptcy attorney like Scott Needleman can help determine which option best suits your situation and provides the fresh start you need.