The Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Having to consider bankruptcy to discharge debt is stressful enough. The availability of several types of bankruptcy only adds to the stress. For individuals, Chapter 7 and Chapter 13 bankruptcies are both designed to erase debt but they have several major differences. After reading about the main features of each type, contact a bankruptcy lawyer, get a free consultation, and determine how to erase your debt!

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is used to eliminate unsecured debts, which are debts not backed by an asset. Credit cards, store cards, payday loans, medical bills, and utility bills are common unsecured debts. These debts are eliminated by selling assets to repay as much as possible. The filer emerges debt-free and can begin rebuilding his or her life.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is designed to prevent foreclosure of the home while reorganizing debts. A monthly repayment plan is followed for a three to five-year period, after which the balances of debts included in the plan are written off, leaving the individual debt-free. Though financial relief is not provided as quickly through Chapter 13, it prevents people from having to sell their homes.

For a non-homeowner with minimal income and a high amount of unsecured debt, Chapter 7 bankruptcy is usually a better option. A means test is used to determine whether income is low enough to have debts discharged through Chapter 7. Personal income is compared to the median income within the state. In some cases, disposable income may be compared to unsecured debt. People who do not pass this means test may still qualify for Chapter 13 bankruptcy so they can repay their debt without incurring additional interest.

When people realize that Chapter 7 bankruptcy erases debt within as little as six months and they pass the means test, their next question is how to file for it. Obtaining a lawyer is recommended due to the complexity of bankruptcy documents and legislation. An attorney will help an applicant complete the paperwork correctly and supply all supporting documentation necessary for a decision to be reached.

Each Chapter 7 filer must pay a statutory fee of $306 (as of January 2013 – check updates here) plus any fees charged by the bankruptcy attorney. Once the bankruptcy court approves the application, the filer begins turning over assets to the bankruptcy trustee. As these items are sold, the proceeds are applied to repay debts in priority order. When no more assets or funds or available, remaining debt is discharged and the individual begins with a clean financial slate. If you are still unsure which type of bankruptcy may be your best option, contact one of our bankruptcy specialists for a free evaluation to find out even more information!