Chapter 7 or Chapter 13

Deciding whether to file Chapter 7 or Chapter 13 bankruptcy is one of the most important parts of the bankruptcy process.

 

The two types of personal bankruptcy offer very different protection and are intended for filers in different financial circumstances.

 

Here’s a look at how each type of bankruptcy works and how to determine which chapter is most likely to suit a filer’s needs.

 

Chapter 7 Bankruptcy: How It Works, Who It Helps

 

Chapter 7 bankruptcy, also sometimes called “liquidation,” is available to individuals with limited income and few exempt assets.

 

Chapter 7 bankruptcy offers a complete discharge of a filer’s eligible unsecured debt – that is, when a successful Chapter 7 case concludes, the filer’s legal obligation to pay certain debts is eliminated.

 

The Chapter 7 bankruptcy process works something like this:

 

·         Filers take the Chapter 7 means test: In order to qualify for Chapter 7 protection, filers must demonstrate that they do not have enough income to make repayments in a Chapter 13 bankruptcy plan. They do this by “passing” the Chapter 7 means test.

·         Filers submit their petition to the court: When the paperwork is submitted, the case officially begins. The filer must appear in court to testify to the truth and completeness of all the information in their paperwork.

·         Filers state their intent for secured loans: Filers can choose to either reaffirm (keep making payments on), redeem (fully repay), or surrender (give up and lose the property connected to) secured debts.

·         Non-exempt property is sold: This is the “liquidation” part of Chapter 7. Any property that is not protected by state or federal exemptions may be sold to raise money to repay creditors. Many people who qualify for Chapter 7 bankruptcy, though, have few (if any) non-exempt assets. (Typical exemptions include a house, a car, work tools, and basic household goods.)

·         Filers receive a discharge: If everything goes smoothly in Chapter 7, a filer may receive a discharge in as little as four to six months.

 

Generally speaking, Chapter 7 bankruptcy tends to work well for people who do not make enough money to repay a significant amount of their debt (as is required in Chapter 13 bankruptcy) and who do not have significant non-exempt assets that the court could sell.

 

Chapter 13 Bankruptcy: How it Works, Who it Helps

 

Chapter 13 bankruptcy, known alternately as “reorganization,” offers filers a chance to repay some or all of their debts with the help of a modified repayment plan.

 

While there is no means test to qualify for Chapter 13, filers must have a steady source of income that allows them to make regular payments to the bankruptcy court.

 

The Chapter 13 process works like this:

 

·         Filers submit their petition to the court: Along with schedules of income, assets, expenses, and debts, Chapter 13 filers must include a proposed repayment plan. The plan must be feasible (that is, the filer must be able to maintain it) or the bankruptcy trustee may not approve it.

·         Filers begin making payments: Shortly after submitting their petition, filers must begin making payments according to the proposed plan. The repayment period generally lasts between three and five years, depending on the filer’s financial circumstances. Missing a payment could cause the court to dismiss a filer’s case.

·         Filers receive a discharge: Assuming filers make payments as planned for the full repayment period, any unsecured debt remaining may be eliminated by the court. At the end of this period, successful filers receive their official bankruptcy discharge, which marks the legal end of their bankruptcy case.

 

Chapter 13 bankruptcy has several advantages for filers, which include:

 

·         Keeping valuables: Because there is no liquidation sale, filers can keep non-exempt assets that would be sold in Chapter 7 cases.

·         Delaying foreclosure: The duration of Chapter 13 means that some homeowners can prevent or delay foreclosure (the automatic stay prevents all collection action while a bankruptcy case is active). However, filers who want to keep their homes must continue making mortgage payments during this time; the bankruptcy court cannot modify the terms of a mortgage.

·         Repaying creditors: Many filers are reassured by Chapter 13’s repayment plan, which allows them to catch up on debts that they intended and wanted to repay.

 

Choosing a Type of Bankruptcy

 

Anyone considering bankruptcy is wise to learn about the various types of protection that bankruptcy can offer.

 

To get a better understanding of how Chapter 7 or Chapter 13 bankruptcy is likely to help, potential filers may want to speak with a bankruptcy attorney.

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