Chapter 7 vs. Chapter 13 Bankruptcy
Bankruptcy can often feel like the end of the road. If you're facing tough financial choices, you should know your legal options and rights before making an informed decision.
At Rushing Law Firm, PLLC, we know how overwhelming financial struggles can feel. We strive to help clients explore bankruptcy regulations and options to work toward financial relief. Located in El Dorado, Arkansas, we serve clients throughout Magnolia, Camden, Crossett, Union County, Columbia County, Ashley County, and Ouachita County.
Our goal is to help our clients understand the differences between Chapter 7 and Chapter 13 bankruptcy and decide which option is best for their situation.
Chapter 7 Bankruptcy
Often called "liquidation bankruptcy," Chapter 7 bankruptcy is designed for individuals or households overwhelmed by unsecured debts, such as credit card balances, medical bills, or personal loans. Chapter 7 allows qualified debtors to discharge most, if not all, of their unsecured debt.
To qualify for Chapter 7, you will need to pass a means test, which compares your income against the median income in the state. If your income is below the established threshold, you will most likely be eligible for Chapter 7. Some of the key features of Chapter 7 bankruptcy include:
Debt relief timeline: Most debts are discharged within three to six months of filing.
Liquidating non-exempt assets: While some property could be sold to pay creditors, Arkansas exemption laws protect a fair amount of personal assets, such as your home, car, and essential belongings.
No repayment plans: Unlike Chapter 13, there is no repayment plan; qualifying debts are wiped clean following the court process.
Impact on secured debt: Chapter 7 only discharges unsecured debts. If you want to keep assets tied to secured loans, such as a home or car, you must stay current on payments or surrender the property.
Chapter 7 allows you to work toward regaining financial stability quickly but may not be the best option if you want to protect significant assets like property or business interests.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, commonly called "reorganization bankruptcy," is designed for people with a regular income who need time to catch up on missed payments or restructure their debt. It works well if you want to safeguard your assets while working on a manageable repayment plan. Some of the key features of Chapter 13 bankruptcy include:
Repayment plan: Debtors propose a repayment plan over three to five years to pay off all or a portion of their debts. Payments are based on disposable income.
Protection of assets: Unlike Chapter 7, Chapter 13 lets you keep all your property, including non-exempt assets like second homes or luxury vehicles, as long as you can maintain your proposed repayment plan.
Avoiding foreclosure: Chapter 13 can be a lifeline for anyone dealing with a pending foreclosure or repossession. Through the repayment plan, they can catch up on overdue payments.
Chapter 13 bankruptcy is often chosen by individuals with secured debts they want to protect, like their home or car, or those who don’t qualify for Chapter 7 based on income.
Key Differences Between Chapter 7 & Chapter 13 Bankruptcy
Criteria | Chapter 7 Bankruptcy | Chapter 13 Bankruptcy |
Eligibility | Must pass means test to qualify | Must have a regular income |
Debt Discharge Timeline | 3–6 months | 3–5 years through a repayment plan |
Protection of Assets | Non-exempt assets can be sold | Assets are protected as long as payments continue |
Use | Best for unsecured debt relief (e.g., credit cards) | Best for protecting assets and catching up on secured debts |
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Arkansas Bankruptcy Laws
If you’re filing for bankruptcy in Arkansas, there are strict state laws that could potentially impact your case. The laws you should consider before filing for bankruptcy include:
Exemption laws: An important aspect of filing for bankruptcy in Arkansas is utilizing exemption laws to protect specific assets. Arkansas allows you to choose between federal exemptions and state exemptions.
Homestead exemption: Arkansas offers one of the strongest homestead exemptions in the country, potentially protecting your home equity entirely.
Vehicle exemption: Under Arkansas exemptions, you can protect up to $3,500 worth of equity in your car.
Filings: All bankruptcy cases in Arkansas are filed through the United States Bankruptcy Court for the Eastern and Western Districts of Arkansas. Consult an attorney to ensure your case is filed in the correct jurisdiction.
Mandatory credit counseling: Arkansas requires all bankruptcy filers to complete a credit counseling course from an approved provider within 180 days before filing.
Which Bankruptcy Option is Right for You?
Choosing between Chapter 7 and Chapter 13 bankruptcy ultimately depends on your financial situation, income level, and long-term objectives.
Chapter 7 bankruptcy is often a good option if you primarily have unsecured debt, such as medical expenses or credit card balances, your income is below the threshold set by the means test, and you prefer a faster resolution to your financial difficulties.
On the other hand, Chapter 13 bankruptcy might be a better choice if you have a steady source of income but are falling behind on secured payments like a mortgage or car loan, you want to protect valuable assets from liquidation, and you earn too much to qualify for Chapter 7 under the means test.
Bankruptcy Attorney in El Dorado, Arkansas
At Rushing Law Firm, PLLC, we strive to simplify the legal process and offer compassionate legal support tailored to your needs.
With years of experience helping clients, we have built a reputation for providing thoughtful, personalized representation. Located in El Dorado, Arkansas, we serve clients throughout Magnolia, Camden, and Crossett, as well as Union County, Columbia County, Ashley County, and Ouachita County. Contact us today to schedule a consultation.