What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

October 20, 2012

What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

People who are overwhelmed with debt and considering filing bankruptcy as a way to help regain their financial footing may feel overwhelmed by the thought. Many are not sure which type of bankruptcy is best for them. Those thinking of filing bankruptcy should be aware of some of the differences between Chapter 7 and Chapter 13 bankruptcy.

Repaying Debts

One of the major differences between Chapter 7 and Chapter 13 bankruptcy is how much of the filer's debts he or she ends up paying. Chapter 7 is also called "liquidation bankruptcy" because the bankruptcy trustee (the person overseeing the case) has the right to liquidate all of the filer's assets that are not protected by exemptions and distribute the proceeds to the filer's creditors. However, many people who choose to file Chapter 7 bankruptcy do not have assets that are not protected by exemptions and therefore are not required to surrender any property. Once the trustee distributes any proceeds to creditors, the filer receives a debt discharge, meaning the filer is no longer personally liable for the debts. Creditors may not pursue any further collection actions on the debts.

Chapter 13 bankruptcy is also called "wage-earner bankruptcy" or "debt adjustment" because in many cases people who choose to file Chapter 13 have regular income but they need time and assistance reorganizing their debts. In Chapter 13 bankruptcy, the filer enters into a repayment plan with creditors, making payments over a series of years. After the payment plan is over, the filer receives a discharge from any remaining debt. The filer ends up repaying more of his or her debts than under Chapter 7 bankruptcy, but less than the full amount. Chapter 13 allows people to protect more assets than Chapter 7, since people are repaying more of their debts.

Qualifying for Bankruptcy

In 2005, Congress amended the bankruptcy code and added a means test for those seeking to file Chapter 7 bankruptcy. If a person makes less than the median income for the state in which he or she lives, then he or she automatically qualifies for Chapter 7.

However, if a person earns more than the median income for the state, then the curt will look at the person's income compared to their allowed expenses as determined by the IRS to find the person's disposable income. If that amount is less than $100 per month, the filer may choose Chapter 7 bankruptcy. If that amount is greater than $167 per month, a person must file Chapter 13. If the amount is between $100 and $167, the court will look at the person's disposable income for the next five years and compare it to the amount of unsecured debt he or she has. If the person's disposable income is 25 percent or less of his or her unsecured debts, then he or she will likely be allowed to file Chapter 7.

There are no specific income qualifications for filing Chapter 13, but a filer must be able to show that he or she will be able to afford to make payments toward the payment plan. The only concrete limitations are on the amount of debt a person has. A person filing Chapter 13 may have no more than $360,475 in unsecured debt $1,081,400 in secured debt.

Time Bankruptcy Takes

Chapter 7 bankruptcy is a much faster process than Chapter 13. Chapter 7 bankruptcy usually takes between four and six months to complete. Chapter 13 bankruptcy lasts longer because of the repayment plan. Repayment plans last either three or five years, depending on whether the filer's monthly income is greater than the state's median income.

Bankruptcy law can be complex and those thinking of filing bankruptcy as a means of rebuilding financial stability should talk to an experienced bankruptcy attorney to see which type of bankruptcy can be most helpful for them.

Article provided by Hackett & Harris LLC
Visit us at http://www.portlandlawyerbankruptcy.com