Differences Between Chapter 7 and Chapter 13 Bankruptcy
Chapters 7 and 13 of the U.S. Bankruptcy Code outline two options for filing for bankruptcy.
To be eligible for Chapter 7, the debtor’s disposable income must be insufficient to repay his debts. The court will then settle the debts by liquidating his non-exempt property.
Chapter 13 is a court-ordered repayment plan that lets the debtor keep some of his assets.
Both Bankruptcy Statutes
Filing for bankruptcy under either statute may stop creditors from garnishing wages, pressing lawsuits, or making contact.
Bankruptcy is federal law and does not let the debtor discharge child support, alimony, or most tax obligations. Both kinds of bankruptcies negatively affect credit.
Chapter 7 (Liquidation Bankruptcy)
Chapter 7 bankruptcy sells some or all of the debtor’s assets to pay creditors. Discharge of most unsecured debts occurs in about 3 months. This normally includes credit card, medical, and personal loan debts, but not student loans or other exceptions such as some personal injury debts or condo fees.
Chapter 7 does not usually discharge secured loans or protect them from foreclosure or repossession. Discharge of a car loan might occur if the debtor gives up the vehicle. The debtor might keep his home, but if he has significant equity, he may have to use that to repay creditors.
Chapter 13 (Reorganization Bankruptcy)
With Chapter 13, the debtor agrees to pay, usually over 3 to 5 years, all or some of his debts via a single monthly payment that a trustee distributes to creditors. Reduction of debt amounts is possible. Chapter 13 can stop foreclosure so the debtor can become current on mortgage payments.
Whether to liquidate or reorganize is an important question when considering bankruptcy, and it is vital to understand the options.