Choosing between Chapter 7 and Chapter 13 bankruptcy in Kentucky

There are discernible differences between Chapter 7 and Chapter 13 bankruptcy in Kentucky.

Anyone considering filing for bankruptcy in Kentucky should be aware of what is required as well as the legal options available. As the U.S. Bankruptcy Court for the Eastern District of Kentucky points out, all consumers must take credit counseling from an approved agency prior to filing. After filing, a financial management course is necessary.

Though those items are consistent between the two forms of individual bankruptcy filings, there are important differences. Consumers should know how a Chapter 7 or Chapter 13 filing will affect their financial future.

What are the differences?

A Chapter 7 filing is one that will discharge all the debts that qualify. Those include credit card debt, past due amounts on utility bills, medical bills, accounts with collection agencies and business debts. Items such as student loans typically are not dischargeable. In a Chapter 7, it is possible for creditors to seize certain property in order to make up for the amount owed to them.

A Chapter 13 filing is a reorganization of debt. Through this option, a consumer develops a plan to repay all or a portion of his or her debts. He or she may keep property and will have between three and five years to make the payments.

Do I need to qualify for one or the other?

A consumer who wants to keep his or her property may want to choose a Chapter 13 filing, and a consumer who simply wants to discharge debt will likely pick Chapter 7. However, there is a means test that will determine certain aspects of the process.

In order to be eligible for a Chapter 7 bankruptcy, a debtor's income must be less than the median income for a household of his or her size. When it comes to a Chapter 13 filing, having a lower median income can also lead to using a three-year repayment plan as opposed to a five-year repayment plan.

Are there exemptions that apply?

Kentucky permits consumers to choose between state and federal exemptions when filing for bankruptcy. These exemptions will determine either how much property the consumer can keep during a Chapter 7 filing, or how much someone will have to pay creditors in a Chapter 13 filing. It is typically in the debtor's best interests to use federal exemptions, which include the following:

  • Up to $12,625 in household goods ($600 per item on household furnishings, clothing, appliances, décor, crops, animals, ect...)
  • Up to $1,600 in jewelry
  • Up to $3,775 in the value of a car
  • Up to $23,675 in equity in a home

Alimony and child support may also be exempt as long as it is deemed necessary. Someone who has received a personal injury award or reparations due to a crime can keep those funds. Certain pensions, retirement accounts and public benefits may also be exempt.

Filing for bankruptcy is not a process that should be taken lightly. It can be complicated and requires the help of a professional. Anyone with questions about bankruptcy in Kentucky should speak with an attorney.