What Are The Differences Between Chapter 7 And Chapter 13?

Chapter 7 and Chapter 13 bankruptcy are two distinct forms of bankruptcy protection provided under the United States Bankruptcy Code. Each chapter serves different purposes and is designed to address specific financial situations. Understanding the differences between Chapter 7 and Chapter 13 bankruptcy is important to understand for those facing financial difficulties. A bankruptcy lawyer can help you determine which type of bankruptcy would be best for your situation.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy” or “straight bankruptcy,” involves the liquidation of a debtor’s non-exempt assets to pay off creditors. Some of the factors involved in this type of bankruptcy includes:

Means Test: To qualify for Chapter 7 bankruptcy, individuals must pass a means test, which evaluates their income and expenses to determine eligibility. If the debtor’s income falls below the state median or they can demonstrate insufficient disposable income to repay debts, they may qualify for Chapter 7 relief.
Automatic Stay: Filing for Chapter 7 bankruptcy triggers an automatic stay, which prohibits creditors from taking collection actions against the debtor, including wage garnishment, foreclosure, repossession, and harassment.
Liquidation Process: In Chapter 7 bankruptcy, a court-appointed trustee oversees the liquidation of the debtor’s non-exempt assets, which may include cash, investments, valuable personal property, and real estate. The proceeds from the liquidation are distributed among creditors to satisfy outstanding debts.
Debt Discharge: Upon completion of the liquidation process, most unsecured debts, such as credit card debt, medical bills, and personal loans, are discharged, meaning the debtor is no longer legally obligated to repay them. Certain debts, such as student loans, child support, alimony, and recent tax liabilities, are typically not dischargeable in Chapter 7 bankruptcy.
Exemptions: Chapter 7 bankruptcy allows debtors to exempt certain assets from liquidation up to specified dollar amounts, as determined by federal or state exemption laws. Common exemptions include homestead exemptions for primary residences, exemptions for personal property like vehicles and household goods, and exemptions for retirement accounts and life insurance policies.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy, also known as “reorganization bankruptcy” or “wage earner’s plan,” enables individuals with regular income to develop a repayment plan to restructure their debts over a period of three to five years. Here are the main factors of Chapter 13 bankruptcy:

Debt Repayment Plan: In Chapter 13 bankruptcy, the debtor proposes a repayment plan to the court outlining how they intend to repay creditors over a specified period, typically three to five years. The plan must be feasible and prioritize certain types of debts, such as mortgage arrears, tax obligations, and priority debts, while also providing for the payment of non-priority unsecured debts.
Automatic Stay: Similar to Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy initiates an automatic stay, which halts creditor collection efforts and foreclosure proceedings, providing the debtor with breathing room to reorganize their finances.
Debt Consolidation: Chapter 13 bankruptcy allows debtors to consolidate their debts into a single manageable monthly payment administered by a court-appointed trustee. The trustee disburses payments to creditors according to the terms of the court-approved repayment plan.
Debt Discharge: Upon successful completion of the repayment plan, any remaining unsecured debts covered by the plan are discharged, providing the debtor with a fresh financial start. However, certain types of debts, such as student loans, child support, alimony, and certain tax debts, may not be dischargeable in Chapter 13 bankruptcy.
Protection of Assets: Unlike Chapter 7 bankruptcy, Chapter 13 allows debtors to retain their assets while repaying creditors through the court-approved plan. Debtors may also have the opportunity to catch up on missed mortgage or car loan payments, preventing foreclosure or repossession.

Thank you to our friends at Leinart Law Firm for their insights into bankruptcy.