Understanding the Differences Between Chapter 7 and Chapter 13 Bankruptcy

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Understanding the Differences Between Chapter 7 and Chapter 13 Bankruptcy

One of the most common bankruptcy questions is “What’s the difference between Chapter 7 and Chapter 13?” In short, Chapter 7 bankruptcy is usually filed by individuals while Chapter 13 bankruptcy is typically filed by businesses. However, the answer to which chapter you should file for, as with most legal questions, is not cut and dried. Below you’ll find a short description of both Chapter 7 and Chapter 13 bankruptcy. You’ll also find a list of bankruptcy issues and a description of how Chapter 7 and Chapter 13 bankruptcies differ on those issues.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is usually filed for by individuals, and it is considered a liquidation bankruptcy. That means that all of your assets that aren’t exempt are sold in order to help pay down some or all of your debt. However, since items like your car, home, and other crucial belongings are typically exempt, most people who file for Chapter 7 bankruptcy don’t have to sell anything, and their debts are simply wiped away. You have a trustee who oversees your case and decides which property you can keep and which you must sell, but if there is no nonexempt property to sell, the creditors won’t receive anything. Because of this, most people with a low income and little to no property – or assets – choose Chapter 7 so they can wipe their record clean of unsecured debts.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is typically referred to as “wage earner bankruptcy” because you have to make a certain income in order to file for it. If you don’t meet the minimum income requirement for Chapter 13 bankruptcy you can file for Chapter 7. However, if you do meet the income requirement for Chapter 13 you must file for Chapter 13, as you won’t be allowed to file for Chapter 7. Under Chapter 13 bankruptcy you set up a repayment plan. That plan dictates how long you will be paying, who you’ll pay, and how much you’ll pay per month. Most of the time you have to commit to either a three-year or five-year plan. Which you have to commit to is dependent upon your income, the amount of your debts, and other factors.

Eligibility

For both Chapter 7 and Chapter 13 bankruptcy there are eligibility requirements and restrictions. Under Chapter 7 bankruptcy, your disposable income has to be low enough to pass the means test. However, for Chapter 13 bankruptcy you can’t have more than $383,175 in unsecured debt or $1,149,525 of secured debt.

Wait Time for Discharge

One of the most common bankruptcy questions is “How long will I have to wait in order to receive my discharge?” That answer depends on your particular case. However, for Chapter 7 bankruptcy, you’ll typically receive your discharge within three to five months. For Chapter 13, your discharge occurs only after you complete all of the payments on your repayment plan. As mentioned above, that wait time is typically between three and five years.

Property Issues

What happens to your property during the bankruptcy process depends on which chapter you file. Under Chapter 7, the trustee appointed to your case can sell any and all nonexempt property in order to pay your creditors. The good news, though, is that most filers don’t have any nonexempt property. Under Chapter 13, you never have to worry about selling your property because you’re paying your creditors through your monthly payment plan.

Benefits and Drawbacks

As with all matters, both Chapter 7 and Chapter 13 bankruptcies have their benefits and their down sides. The benefit of Chapter 7 is that you can receive a discharge from your creditors relatively quickly, and you’ll be able to get a clean start and get back on your feet in just a few months. The down side, though, is that you might have to sell some of your property, and there’s no way to catch up on missed payments or avoid home foreclosure or vehicle repossession. The benefit of Chapter 13 bankruptcy is that you can keep your property, catch up on missed payments, car payments, and nondischargeable priority debt payments. However, the downside is that you have to make monthly payments, and it takes a matter of years to get your discharge.

As you can see, the differences between Chapter 7 and Chapter 13 bankruptcy are rather stark. However, deciding on the type of bankruptcy to file is a complicated legal decision, and you would be wise to consult with a bankruptcy attorney in your area in order to ensure the best possible outcome for your case.

 

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