The Differences Between Chapter 7 and Chapter 13 Bankruptcies

For many individuals in debt, bankruptcy is the last resource to help get out from under all-too-heavy financial burdens. In the past, bankruptcy was considered to be somewhat of an easy out but today there are much tougher bankruptcy laws and these changes make it more difficult to go through the process of bankruptcy unless you are genuinely qualified.

When dealing with consumer debt, there are two main types of bankruptcies that will be available. Chapter 7 and 13 allow debtors to eliminate most or all of their debts. Consumers may qualify to file for either or both types depending on their financial situation. Let’s take a look at the differences and similarities with Chapter 7 and Chapter 13 bankruptcies.

About Chapter Seven
A Chapter 7 bankruptcy is also known as a liquidation bankruptcy, meaning that a consumer filing for Chapter 7 will have their assets assessed for possible liquidation in order to pay off debts. A trustee will be appointed by a bankruptcy court. Only certain items a person owns can be liquidated for debts. Items such as extra vehicles, second houses and family heirlooms can be sold. Items that can not be liquidated include: your current residence, pensions, clothing, and present household items such as furniture. Once the assets have been sold and the money is put towards existing debts, the remainder of the debts are discharged if eligible and the consumer is no longer required or held responsible for payment. Chapter 7 bankruptcy is a good resolution for those who do not have a foreseeable way out of their debts. While their credit rating will be negatively impacted for 10 years, it does mean that the consumer will have eliminated their debts and will be able to start anew.

About Chapter Thirteen
Unlike Chapter 7 bankruptcy where the consumer can eliminate and have debt discharged after assets are liquidated, Chapter 13 bankruptcy allows you to have your debts restructured in a manner that is more reasonable for you to repay. The debtor must then submit to the court a plan for repayment. The majority of repayment plans last for 3-5 years. In order for the plan to be approved, the debtor must prove that there is sufficient income for the plan tow work and the debtor would reasonably be able to commit to the repayment plan. If the creditors disagree with any of the repayment plan, they are allowed to contest it and ask for different repayment terms. Once plan negotiations have been completed, the bankruptcy court will approve the plan and the creditors can not attempt to collect additional monies from the debtor or change any terms of the plan approved by the court.

One of the reasons people prefer a Chapter 13 bankruptcy over Chapter 7 is because homeowners have a chance to keep homes out of foreclosure. Past due mortgage payments can be included in the repayment plan and allow the homeowner to catch up over time. This may make the home payments even more affordable. On the reverse side of that, if a home is already in foreclosure, filing for Chapter 13 bankruptcy will not enable the homeowner to save it. Missed payments per the terms of the repayment plan can also jeopardize the home’s foreclosure.

For those individuals who want to make the earnest attempt to pay back their debt but can’t do it without the repayment terms, Chapter 13 is the best bet. Filing Chapter 13 also helps to prevent losing assets that people may not wish to part with such as family mementos and other items.

Note About Both Bankruptcy Types
Not all debt can be discharged in a bankruptcy. Some of the debts a debtor has that can not be discharged include: student loans, child support, alimony, damages awarded in a personal injury lawsuit or any income taxes you owe. Regardless of a bankruptcy ruling, these debts will still be the responsibility of the debtor.