Bankruptcy: Chapter 7 Vs Chapter 13

If you are facing serious debts and you’re having difficulty staying on top of them, it’s important to consider the options that you may have for getting out of debt. If you can’t keep up on repaying your loans or credit card bills, a Chapter 7 or Chapter 13 bankruptcy can be one of the most common programs that you can use to eliminate or reduce your debts. A Chapter 7 bankruptcy is a common solution, and it’s known as liquidation bankruptcy. Under this form of bankruptcy, most of your property will be sold off in order to pay your debts. A Chapter 7 bankruptcy is generally meant for people that have limited incomes or that are only able to pay back a portion of their debts. In this article we are going to go over Chapter 7 Vs 13, and which might best fit your needs.

A chapter 13 bankruptcy is also referred to as a reorganization bankruptcy. This type of bankruptcy involves property protection and your assets will not be sold to pay off your debts. Under a Chapter 13 bankruptcy, you will complete a repayment plan in which you’ll continually pay your creditors a portion of your outstanding debt in a reorganized payment plan for your finances. The repayment plan will be court-mandated and you’ll be responsible for managing the process, that way you can keep your property. 

After the repayment plan is completed you will be discharged of your debt and this means that you will no longer have to pay off the remainder of your debt. The debt that’s agreed upon in your bankruptcy proceedings under chapter 13 will be all that you’re responsible for; as long as you keep up with the repayment plan, you will be able to fully discharge your debt obligations. 

Some of the basic aspects of each bankruptcy type

Chapter 7

  • Involves liquidation
  • Business entities and individuals may file
  • Must pass a means test for qualification
  • 3 to 5-month resolution
  • Trustees can sell the non-exempt property to pay creditors
  • Will not remove liens
  • Loan cramdown may not occur
  • Debtors can discharge debts quickly and start fresh
  • The trustee will likely sell non-exempt property, and exempt property may still be foreclosed or repossessed. 

Chapter 13

  • Reorganization bankruptcy
  • Only individuals
  • 3 to a 5-year repayment plan
  • Debtors will keep all property but must pay unsecured creditors the amount equal to the value of non-exempt assets. 
  • Can remove liens if requirements are satisfied
  • Can reduce principal loan balance with cramdown
  • Debtors can keep their property and catch up on missed payments
  • Making monthly payments over 3 to 5 years and some unsecured debts may be forgiven. 

Could I Potentially Lose My Property if I File for Bankruptcy?

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy, most of your property will be sold in order to pay off your debts. Some of your personal property will remain exempt, but there are certain limits on the value of exemptions that are possible. There are state and federal exemption rules that govern what will be available for your exemption level. A married couple that files for bankruptcy together can usually double the value of their exemptions. Exemptions on a homestead are available up to $23,000 on a motor vehicle up to $3775, personal property up to $12,625, and retirement accounts up to $1.28 million. 

Chapter 13 Bankruptcy

None of the assets that you have on hand will be sold when you file. With a chapter 13 bankruptcy, you agree that you will be completing a court-approved repayment plan for your debts. Depending on your overall income, the repayment period for your bankruptcy will take 3 to 5 years. Throughout the repayment plan, you’ll be catching up on back payments for all of your secured assets including your home, car, and more. 

Unsecured Debt in Bankruptcy

Unsecured debts are typically medical debt and credit card debt, and these can be discharged using a Chapter 13 or Chapter 7 bankruptcy. If you qualify for Chapter 7, any unsecured debts will be wiped out when the court approves your filing. This filing process can often take a few months. With the process of a Chapter 13 filing, you need to continue making payments on unsecured debts throughout your repayment plan. Based on your court-approved order, you’ll need to successfully complete a repayment plan, and any unsecured debts from that repayment plan may be discharged after you’ve followed every order. 

If you are interested in learning more about the bankruptcy process, contact us today to learn more. We can make sure the process can run smoothly for you. We are a team of bankruptcy experts that can help you through the process of filing and determine the best form of bankruptcy to suit your current financial situation.