The Difference Between Chapter 7 & Chapter 13 Bankruptcy

The Difference Between Chapter 7 & Chapter 13 BankruptcyChapter 7 and Chapter 13 are two of the most common types of bankruptcy filings in the United States. Although they both function to eliminate or restructure debts, there are some key differences. Which one fits your needs depends on a lot of different factors. Your debts and the terms of their repayment play a big role in making this determination. Your assets and your sources of income matter too.

 

Chapter 7

Chapter 7 bankruptcy allows the filer to erase non-secured debts. These debts might include credit cards, medical bills or personal loans. When the court erases the debt, the filer doesn’t have to repay the debt ever. A Chapter 7 action can also stop wage garnishment.

This is a common filing option for individuals who have low income. If you make too much, the court may conclude that you’re able to repay some of your debt over time. In that case, you need to file a Chapter 13 action.

A Chapter 7 filing begins when a debtor files bankruptcy paperwork in the appropriate U.S. court. The court appoints a trustee to oversee the process. It’s the trustee’s job to review documents. If you need to sell certain property to pay back creditors, the trustee oversees these sales.

If you have assets that don’t qualify for a special exemption, the trustee takes the assets and distributes them to your creditors. If you don’t have any of these assets, you walk away and your creditors receive nothing. Ultimately, this is a good way for a person with low income, high debt and few assets to discharge their non-secured debts.

Chapter 13

A Chapter 13 bankruptcy allows a debtor to reorganize their debt and then pay it back using their regular income. A debtor may use the process to pay back all of their debts, or they may use it to pay back some of their debts. While a Chapter 7 filing might seem more attractive, there are reasons that you may need or want to file for Chapter 13 instead. Both a Chapter 13 action and a Chapter 7 action allow a debtor to stop wage garnishment.

A Chapter 13 filing may allow you to catch up on overdue mortgage payments. You may also get rid of unsecured liens on the home. This is unlike a Chapter 7 filing that allows an exception for a home to only a certain amount.

If your income is too high to file for Chapter 7, a Chapter 13 filing may be your only option. However, a Chapter 13 filing allows you to keep nonexempt assets. That is, if you have personal property that exceeds Chapter 7 limits, a Chapter 13 action may allow you to keep this property. You’ll receive a repayment plan that’s based on your personal expenses, debts and income.

Key Differences

A Chapter 7 allows you to completely discharge non-secured debts. A Chapter 13 allows you to discharge debt in some cases. In a Chapter 13, you receive a payment plan to pay back at least some of your debt.

There’s no payment plan in a Chapter 7. Filing a Chapter 7 action is for low-income individuals. High-income individuals must pursue a Chapter 13. Both a Chapter 7 and a Chapter 13 action allow a debtor to stop most types of wage garnishment. While a Chapter 7 case takes only 3-5 months, a Chapter 13 case can take up to 5 years.

Only a Chapter 13 action allows a debtor to remove unsecured liens on their home. While a Chapter 7 action allows for quick disposal of large amounts of debt, a Chapter 13 action allows the debtor to keep non-exempt property. Need help filing for bankruptcy? Schedule a free meeting with bankruptcy attorney Thomas Pyles. He will take a closer look at your situation, help you decide the best course of action to take and if need be, help you file for bankruptcy. Use the form below to sign up for your free consultation.

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