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When people first begin to think about and learn about bankruptcy, they want to consider Chapter 7 vs Chapter 13 because it helps them understand bankruptcy easier and better.
Difference Between Chapter 7 And Chapter 13 Bankruptcy
So, what is the difference between chapter 7 and chapter 13 bankruptcy? While both are types of bankruptcy and have some factors in common, they are actually quite different.
Chapter 7 bankruptcy is called a “liquidation” bankruptcy because the idea is for the bankruptcy trustee to sell your property that is not exempt and distribute the net proceeds to your creditors. You keep your property that is exempt from the bankruptcy, but you lose property that is not exempt from the bankruptcy if you have equity in the property. In most Chapter 7 bankruptcies, the unsecured creditors end up receiving nothing.
Chapter 13 bankruptcy is called an “adjustments of debts of an individual” bankruptcy because the idea is adjust or modify the amount of money that you owe on some debts and then pay that amount to your creditors. You keep your property as long as you make the required payments. In Chapter 13 bankruptcies, the unsecured creditors receive either all or at least a small part of the money that is owed to them.
Perhaps an overly simplified way of looking at a Chapter 7 vs Chapter 13 bankruptcy is to look at 3 questions:
1. Does the bankruptcy trustee sell your property?
Chapter 7 - Yes, the trustee will sell property that is not exempt from your bankruptcy.
Chapter 13 - No.
2. Do you have to make monthly payments to the bankruptcy trustee?
Chapter 7 - No.
Chapter 13 - Yes.
3. How long will your bankruptcy last?
Chapter 7 - Normally, 4 to 6 months.
Chapter 13 - Normally, 3 to 5 years.
Do You Have A Choice On Which Type Of Bankruptcy To File
As a practical matter, you really do not have a choice on which type of bankruptcy to file. When you go through an analysis of your financial situation and consider your income after expenses, if you have some disposable income each month, you are not eligible for a Chapter 7 bankruptcy and must file a Chapter 13 bankruptcy. If you do not have disposable income, you are not eligible for a Chapter 13 bankruptcy and must file a Chapter 7 bankruptcy, if you qualify for it.
Chapter 13 vs Chapter 7 In Some Specific Situations
Another way of comparing Chapter 13 vs Chapter 7 bankruptcy is to look at how they can affect the same situation.
1. You are several months behind on your home mortgage payments and want to keep your home.
Chapter 7 - Probably not much help because under a Chapter 7 bankruptcy, you either pay your secured creditors, such as mortgage lenders, or they can seek legal recovery of the property such as foreclosure. You are not given time to pay past due payments.
Chapter 13 - Can help you because under a Chapter 13 bankruptcy, you are allowed to
catch up on past due mortgage payments by paying a little bit on the arrearage each month until you are current on your mortgage payments.
2. You have big ticket assets, such as a car, that are fully paid for and you want to keep them.
Chapter 7 - Probably not much help because under a Chapter 7 bankruptcy, most likely, only a portion of the car’s value would be exempt. The bankruptcy trustee would probably sell the car and give you the cash which represents your exempt portion of the car’s value.
Chapter 13 - You would probably keep the car as long as your creditors received as much money under your Chapter 13 bankruptcy as they would receive under a Chapter 7 bankruptcy.
3. You have a lot of credit card and personal loan debt, but do not have the money to pay the bills.
Chapter 7 - Probably would help because most unsecured debt is discharged in a Chapter 7 bankruptcy even though you do not have the money to pay the debts.
Chapter 13 - Probably would help if you are able to pay the credit card and personal loan holders at least some money. Probably not help if you cannot pay the credit card and personal loan holders any money.
Chapter 7 vs Chapter 13 - How Are They Similar
Above, I have explained how Chapter 7 and Chapter 13 bankruptcy are different, but how are they similar?
First, part of the bankruptcy process is similar. Both types of bankruptcies start when you file a petition in the bankruptcy Court. The information contained in the petition will vary depending on the type of bankruptcy, but in both bankruptcies, it is the petition that starts the bankruptcy. Also, in both types of bankruptcy, after you file your petition, there is a 341 meeting of creditors where the trustee and creditors can ask you questions. After that, a Chapter 7 bankruptcy and a Chapter 13 bankruptcy will take different paths.
Second, under both a Chapter 7 bankruptcy and a Chapter 13 bankruptcy, there is an automatic stay that immediately stops most civil actions to collect debts. In both cases, the automatic stay starts the instant that your bankruptcy petition is filed.
Third, you will get rid of most of your unsecured debt under both types of bankruptcies even though you will have to pay something under a Chapter 13 bankruptcy.
Finally, if you complete your bankruptcy, whether a Chapter 7 or a Chapter 13, you will receive a discharge of your debts that are dischargeable.
This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.
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