Comparing Chapter 7 and 13 Bankruptcy
The U.S. Bankruptcy Code offers individuals two different options to address financial predicaments: Chapter 7 and 13.
If wondering how to file for bankruptcy, ask a bankruptcy attorney if Chapter 7 or 13 could help you:
Chapter 7 Bankruptcy: The Discharge of Unsecured Debt
Under this type of bankruptcy, unsecured debt (bills that aren't tied to property, unlike a mortgage or car loan) is "discharged", which means once the bankruptcy is final, the debtor never has to pay for those bills again.
Chapter 7 bankruptcy is often referred to as “liquidation” because the bankruptcy trustee in your case has the option of liquidating or selling your non-exempt assets in order to pay back some of your creditors. However, you should know that most Chapter 7 bankruptcy petitioners do not have any non-exempt assets, meaning that there may not be any sale of your items.
Since the new bankruptcy law of 2005, people must pass a Chapter 7 means test in order to qualify for Chapter 7 bankruptcy. Ask a bankruptcy attorney if you are eligible to file for bankruptcy under the Chapter 7 code.
Chapter 13 Bankruptcy – The (Lower) Monthly, Interest-Free Repayment Plan
While Chapter 7 bankruptcy is referred to as “liquidation,” Chapter 13 bankruptcy is known as a “reorganization” of debt, meaning that you will be given time to repay secured debts (such as past-due mortgage or car payments) that may have become delinquent as a result of some sort of personal crisis.
Chapter 13 bankruptcy may help you stop foreclosure or repossession (learn more about bankruptcy and car repossession). The Chapter 13 repayment plan comes in the form of a three-to-five year repayment plan so you can catch up over time on past-due debts.
As your local bankruptcy lawyer can examine with you in more detail, filing Chapter 13 bankruptcy may apply to your situation if you show that you have a regular income and the ability to make your payments on time and if your unsecured debts are less than $360,475 and your secured debts are below $1,081,400.
If you’re like many American homeowners who are facing the possibility of foreclosure, Chapter 13 bankruptcy may be able to help stop foreclosure.
What’s Better for You – Chapter 7 or Chapter 13 Bankruptcy?
As you’re likely wondering which of these personal bankruptcy options may be better for your needs, utilize the following checklist to gauge whether Chapter 7 or Chapter 13 bankruptcy may be more appropriate for you at this time.
You May Want to Consider...
Chapter 7 bankruptcy if you have:
- little property except basic necessities like furniture and clothing
- little to no money left after paying your basic monthly expenses
- no money to meet your monthly expenses each month
Chapter 13 bankruptcy if you have:
- a lot of equity in a home or another piece of property that you want to keep
- regular income and the ability to pay your living expenses, but are unable to keep up with paying your debts on time
- received foreclosure notices/may lose your home
What Could Bankruptcy Offer?
Chapter 7 bankruptcy typically offers:
- a complete discharge, or elimination, of your debts
- a fast and timely process (your discharge may be attainable within just a few months
- protection from creditors, who cannot contact you during your Chapter 7 case or after your receive discharge
Chapter 13 bankruptcy typically offers:
- breathing room to keep your home and car
- more time to catch up on delinquent accounts (typical Chapter 13 bankruptcy repayment plans last 3-5 years)
- freedom from creditors (they cannot contact you during the 3-5 year protection period)
- protection for co-signers
Contacting a local bankruptcy lawyer is a smart way to go beyond the general information provided above and to further examine Chapter 7 and Chapter 13 bankruptcy as they may apply to you.
The above synopsis of bankruptcy law is by no means all-inclusive and
is not legal advice. These laws may have changed
since our last update and there may be additional laws that apply in
your situation. For the latest information on bankruptcy laws, please
contact a local bankruptcy attorney in your area.
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