Bankruptcy filings in the US have been on the rise, with over 750,000 cases registered in 2022 alone, according to data from the American Bankruptcy Institute. Two primary forms of personal bankruptcy, Chapter 7 and Chapter 13, are increasingly relevant, particularly given the interconnectedness of global financial markets.
Chapter 7 bankruptcy, often referred to as 'liquidation' bankruptcy, is typically a quicker process, with most cases concluded within six months. Its primary aim is to discharge eligible unsecured debts such as credit card balances, medical bills, and personal loans, totalling over $14 trillion in the US. A bankruptcy trustee reviews the filer's assets; if any property is not protected by exemptions, it may be sold to repay creditors. However, many Chapter 7 cases are 'no-asset' cases, meaning all the filer's property is exempt from seizure. Qualification for Chapter 7 is determined by a 'means test,' which evaluates income, household size, and expenses against state median income figures, with approximately 60% of Americans qualifying.
In contrast, Chapter 13 bankruptcy, also known as a 'repayment plan' or 'wage earner's plan,' involves a structured repayment schedule lasting between three to five years. This option is generally suited for individuals with a regular income who seek to retain assets that might otherwise be at risk in a Chapter 7 filing. It allows debtors to catch up on arrears for secured debts like mortgages or car loans, potentially preventing foreclosure or repossession, impacting millions of homeowners and businesses. The monthly payment in a Chapter 13 plan is influenced by factors including income, expenses, debts, assets, and any outstanding mortgage or car loan payments.
A key distinction lies in the cost and duration. Chapter 7 is often less expensive overall due to its shorter timeframe, with average costs ranging from £1,500 to £3,000. In contrast, Chapter 13 can incur higher costs due to attorney fees, trustee fees, and the ongoing monthly plan payments over several years, totalling around £20,000 on average. While Chapter 7 aims for a swift discharge of debt, Chapter 13 provides a framework for managing and repaying debts over a longer period, offering protection for assets and a chance to restructure finances without immediate liquidation.