Understanding the difference between chapter 7 and chapter 13

Chapter 7 and Chapter 13 Explained

Filing for bankruptcy can be one of the most difficult decisions of a person’s financial life. When it comes to eliminating overwhelming debt, there are several options to choose from. Each of these have their own positives and negatives, and as every one’s situation is unique, it’s important to understand the differences between them. There are critical differences between filing for bankruptcy under the Chapter 7 and Chapter 13 statutes.

Chapter 7: Straight Bankruptcy Liquidation

Filing for bankruptcy under Chapter 7 will dismiss most types of unsecured debt from a persons financial history. The person filing will be required to sell any nonexempt property in order to repay their creditors. This is part of the liquidation process, where some of your your assets are sold to pay off part or all of your debt. A typical filing under this chapter can take several months to be considered complete. Many debtors who chose this option will keep all or the majority of their existing property, and those in a higher-income bracket may not be eligible for Chapter 7.

In regards to foreclosure, Chapter 7 may temporarily stop the process, but unless the debtor is able to catch up and become current on their mortgage, eventually the foreclosure will continue. In order to be eligible for Chapter 7, a persons income must be less than their state’s median, or must pass a means test. Anyone filing for Chapter 7 must also obtain mandatory crediting counseling within 180 days prior to filing a petition with the court. A record of bankruptcy will remain on the debtors credit report for up to 10 years from the initial date the petition was filed.¬†Chapter 7 works best for unemployed debtors with few assets, or unemployed homeowners who have an upside-down mortgage.

Chapter 13: Payment Plan for Regular Income

Like those filing for Chapter 7, debtors filing for Chapter 13 must also obtain mandatory credit counseling within the 180 days prior to petitioning the bankruptcy court. However, Chapter 13 is more commonly used by individuals who have regular income, and the means to make payments towards their debts. An individual who is badly in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy), under Chapter 13 (reorganization), Chapter 12 (family farmer reorganization), or under Chapter 11 (reorganization of a company, or an individual debtor whose unsecured debt exceeds $383,175.00 and/or whose secured debt exceeds $1,149,525.00). To successfully complete the requirement for the repayment plan, and have their remaining debts forgiven, the debtor must make all payments in accordance to the court-mandated plan.

Chapter 13 allows for a repayment plan, where debtors repay their creditors, some partially and some in full. The payment plan usually lasts three to five years, and at the end, most of the remaining unsecured debts will be released. No property is liquidated in this type of bankruptcy, and requires a regular income, with no restrictions on amount. Chapter 13 can halt foreclosure and arrange for payment of past due mortgage costs. A record of this type of bankruptcy will remain on the debtors credit report for 7 to 10 years from the initial date the petition was filed. Chapter 13 works best for unemployed homeowners who possess significant equity or employed homeowners who are facing foreclosure or mortgage delinquency.


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