What are the differences between Chapter 7 and Chapter 13 bankruptcy?

What are the differences between Chapter 7 and Chapter 13 bankruptcy?

| Jun 2, 2020 | Bankruptcy |

If you have reached the point where your debt is out of control and making your life difficult, you may potentially benefit from filing for bankruptcy. Bankruptcy can give you an automatic stay on the day that you file that will stop collection activity by your creditors.

If the courts approve your petition, you will also secure the discharge of your unsecured debt and be able to rebalance your budget with the money that the discharge frees up for you. Most people who file for bankruptcy as individuals will use either Chapter 13 or Chapter 7. Learning a bit about what’s different between these two kinds of personal bankruptcy can help you make a more informed choice.

Chapter 7 bankruptcy is more aggressive but available to fewer people

Chapter 7 is also known as liquidation bankruptcy. In a Chapter 7 filing, the courts typically discharge certain unsecured debts without requiring any sort of repayment. In order to protect lending institutions and banks, Chapter 7 bankruptcy is only available to people who pass a means test that compares their income to the state median.

Additionally, Chapter 7 bankruptcy can require the sale or liquidation of certain assets. However, there are exemptions that protect valuable assets like the equity in your home.

Chapter 13 bankruptcy has fewer restrictions but more requirements

Chapter 13 is sometimes known as a wage earners plan. If you choose Chapter 13 bankruptcy, you will generally have to negotiate a repayment plan with some of your creditors. You will have to make payments on your debt via the trustee appointed by the courts for three to five years in most cases.

Once you complete those payments, provided that you qualify and comply with all the terms that by the court, the remaining balance on your qualifying unsecured debts will receive a discharge. Since there’s no liquidation and no means test, Chapter 13 bankruptcy can help those with higher income or more significant assets.

An experienced bankruptcy attorney can help you determine which of these two types of bankruptcy is better for you based on your own unique situation.