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

06
January

If financial circumstances have you considering bankruptcy, there are two basic options. You can choose to file a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy. Chapter 7 is known as a liquidation bankruptcy, while Chapter 13 is a wage-earner’s reorganization. Both forms of bankruptcy have their advantages. Not everyone can qualify for both types of bankruptcy.

Chapter 7 and Chapter 13

There are a number of things both types of bankruptcies have in common. Both can be filed by an individual. Individuals are required to file a series of financial statements and provide documentation including tax returns. There is a requirement that you take a credit counseling course by an approved agency and receive a certificate indicating you successfully completed it less than 180 days prior to filing your bankruptcy petition. A filing fee and several other fees (totaling about $300.00) also must be paid.

Chapter 7 Bankruptcy

In this form of bankruptcy, the purpose is to discharge your debts and be able to get a fresh start on your life. You basically must liquidate your assets and any proceeds from the liquidation ( the Bankruptcy Trustee will attempt to sell any assets you may have) will go toward paying your creditors. Each state has differing limits on what you are allowed to keep. For instance, you can keep one car for basic transportation, but it can not be worth too much. You’ll probably be allowed to keep a 1998 Buick, but not a 2009 BMW. You also can keep about a thousand dollars (it varies) worth of personal property. Your home is exempt in certain states (ie. Florida) from having to be sold (even if you have a million dollars worth of equity in it).

The process is a bit daunting, but, if you hire a competent bankruptcy attorney, they will guide you step by step so you won’t need to worry. First thing that is done is to file a petition with the Bankruptcy Court in the jurisdiction where you live. Next, you will be asked to fill out a series of forms containing pertinent information about your financial life. There will be a form where you list all your monthly expenses and your monthly income. Another form will require you to list all of your creditors such as credit card companies, mortgage holder, car loans and so forth. Another schedule will want you to list any rental agreements (unexpired leases) or contracts that have not yet been completed (such as a two year agreement with a cellphone provider). A copy of your tax return(s) and a certificate showing you received credit for the required financial counseling course within 180 days of filing your bankruptcy petition will complete the paperwork.

Your attorney submits the required documents to the court and a hearing is set before the Bankruptcy Trustee.
When you go to the hearing, you will be asked some questions by the trustee in a process that normally takes just a few minutes (trustees may hear 50 or more cases in one day). Assuming there are no surprises, you will receive a letter from the court in about a month or so, discharging all debts and finalizing your bankruptcy.

Chapter 13 Bankruptcy

This is a reorganization that allows the debtor to make arrangements to pay off part of his debt, usually within 3 to 5 years. A maximum limit is set for unsecured debt (currently $360,475) and secured debt (currently $1,081,400). You will be asked to negotiate new payment arrangements with your creditors based on your earnings and ability to pay. The Trustee will decide what is fair (usually 50% or so of the full amount). Each month, you will submit a lump sum, like a consolidation loan, to the trustee, who will then pay each creditor according to plan. The major advantage in this form of bankruptcy is being able to save your home from foreclosure. Additionally, you can take some solace in knowing you are at least paying back some of your debt.

In summation, file a Chapter 7 to liquidate all debt and file a Chapter 13 to create a repayment plan that will forgive some debt and give you time to pay the rest.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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