Key Differences Between Chapter 7 and Chapter 13 Bankruptcy in Washington

Bankruptcy can be a daunting process, but understanding the options available can help individuals make informed decisions about their financial future. In Washington State, two of the most common types of bankruptcy filings are Chapter 7 and Chapter 13. Each has its own characteristics, benefits, and implications. Below, we explore the key differences between Chapter 7 and Chapter 13 bankruptcy in Washington.

1. Definition and Purpose

Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," is designed to eliminate unsecured debts, such as credit card debt and medical bills. This process typically allows individuals to start fresh financially.

On the other hand, Chapter 13 bankruptcy, known as "reorganization bankruptcy," is geared toward individuals who have a regular income and wish to repay their debts over a specified period—usually three to five years—while retaining their assets.

2. Eligibility Requirements

To qualify for Chapter 7 bankruptcy in Washington, individuals must pass the means test, which evaluates their income against the state’s median income levels. If their income is below the median, they can file for Chapter 7. If it exceeds the threshold, they may have to file for Chapter 13 instead.

In contrast, Chapter 13 bankruptcy does not have a strict means test, but it does require individuals to have a regular income and a secured debt limit that must not exceed $1,257,850, and an unsecured debt limit that must not exceed $419,275 as of 2023.

3. The Duration of the Process

Chapter 7 bankruptcy is generally quicker than Chapter 13. The entire process typically takes about four to six months from filing to discharge. In many cases, the debtor receives a discharge of eligible debts shortly after the initial court meeting.

Chapter 13 bankruptcy, however, spans over a three to five-year repayment plan. This duration depends on the individual’s income and debt levels, making it a more extended commitment.

4. Asset Retention

One of the major advantages of Chapter 13 bankruptcy is the ability to keep your assets. Debtors propose a repayment plan that allows them to maintain their property while working to pay back creditors.

Conversely, in Chapter 7, non-exempt assets may be liquidated by a bankruptcy trustee to repay creditors. Washington has specific exemptions that allow debtors to protect certain properties, but there is still a risk of losing assets not covered under these exemptions.

5. Impact on Credit Score

Both Chapter 7 and Chapter 13 bankruptcies will impact credit scores, but the effects differ in intensity and duration. A Chapter 7 bankruptcy can remain on a credit report for up to ten years, while Chapter 13 bankruptcies stay for seven years.

However, individuals who file for Chapter 13 might find it easier to rebuild their credit more quickly due to the repayment plan and consistent payments made during the bankruptcy process.

6. Discharge of Debts

In Chapter 7, many unsecured debts, including medical bills and credit card debt, can be discharged, freeing individuals from the obligation to pay them.

Under Chapter 13, not all debts can be discharged. Instead, the plan primarily allows for the restructuring of payments. Some debts, such as certain taxes and student loans, typically survive even after completion of the repayment plan.

Conclusion

Choosing between Chapter 7 and Chapter 13 bankruptcy in Washington requires careful consideration of an individual's financial situation, debts, and goals. Each option serves a distinct purpose and offers different advantages and challenges. Consulting with a bankruptcy attorney can be invaluable in navigating this complex process and determining the best path forward for financial recovery.