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Chapter 7 Versus Chapter 13 Personal Bankruptcy

Chapter 7 Versus Chapter 13 Personal Bankruptcy

When an individual needs to file personal bankruptcy, the two available options are Chapter 7 and Chapter 13. However, certain regulations determine which one an individual may file.

Chapter 7

This chapter was created to eliminate debts. It is available to individuals and corporations. If an individual has credit card, personal loan, payday loan and other types of unsecured debts that are too burdensome for him to service and pay down, then this bankruptcy chapter may be the appropriate remedy. The chief purpose of a Chapter 7 liquidation case is to wipe out prior debts entirely and to provide the debtor with a fresh start for rebuilding financially.

When the debtor completes her bankruptcy, she receives a discharge. The discharge is a removal of the debts encompassed within the bankruptcy - in essence, treating them as being taken care of by virtue of the bankruptcy.

With Chapter 7 cases:

  • Debtors have little property aside from basic life necessities (clothes, furniture, etc.).
  • They have no money remaining after paying monthly expenses or they are not able to pay monthly expenses.
  • Most of their unsecured debts can be discharged.
  • These cases move fast and take only a few months.
  • Automatic stay protections cease creditor collections.
  • Debtors must qualify under the statutory "means test.""
  • Debtors must take credit counseling session before filing bankruptcy.

Chapter 13

This chapter is for prospective individual debtors who have an income source and are in the position to repay at least a portion of their debt burden if they are given sufficient time. That repayment of debt may entail the payment of an interest rate that is lower than prevailing market rates. The main purpose of a Chapter 13 reorganization is to allow the debtor to repay some of her debts without incurring constantly-building late fees, interest and penalties due to lapsing or falling behind in payments.

The chief advantage of a Chapter 13 bankruptcy is that by its plan, a debtor can restructure her debt with creditors through revised agreements on amounts, time lines and interest rates. At the end of the bankruptcy, even if debtor only repays a portion of her debts, they are still deemed paid in full. Debtors choosing to file for Chapter 13 bankruptcy have homes and/or cars they wish to retain and protect from creditors' seizures. This chapter permits the debtor to retain those assets and that property, while concurrently setting up a repayment plan for debts with her creditors.

With Chapter 13 cases:

  • Debtors have a great deal of equity in their homes and/or cars or other property they want to retain.
  • They have income and can pay some living expenses but can't seem to keep up with regular payment schedules each month.
  • They are permitted to retain most property.
  • They can spread out their payments on accounts that are delinquent.
  • They have about three to five years to catch up their payments on a reworked schedule (plan) that is agreed to with the trustee and creditors and is approved by the court;
  • They make a single payment each month to the trustee, and the trustee pays the creditors from that payment throughout the plan's term.
  • Debtors' cosigners might be protected under this chapter.
  • This chapter is eligible to any debtor with unsecured debts under $360,475 and secured debts under $1,081,400.