Bankruptcy Chapter 7 vs Bankruptcy Chapter 13

The case attorney converts the property into cash and pays back the creditors. However, certain kinds of property – called ‘exempt assets’ – can be protected from seizure.

Chapter 13 bankruptcy is designed for individuals who want to pay back their debts but need an extended period of time to do so. Chapter 13 bankruptcy does not require the debtor to sell their assets. Under chapter 13 bankruptcy, debtors make affordable monthly payments to creditors after necessary living expenses have been taken into consideration.

No Assets vs Regular Income

A person with limited or no assets would most likely file a chapter 7 bankruptcy – with no assets, it is a relatively simple procedure. However, if the debtor has sufficient income to re-pay at least a portion of the debts, a Wage Earner Repayment Plan would be implemented under Chapter 13.

Unsecured Debts and Completion Time

A debtor is not liable to pay any unsecured creditors under the terms of Chapter 7 bankruptcy – unless otherwise instructed by the bankruptcy court. Also you can expect a chapter 7 bankruptcy to be completed within several months.

Although a Chapter 13 bankruptcy does not require selling assets, the debtor is required to repay some or all unsecured debt back through the court. This is usually done over a period of up to five years. The payments will be at least as much as the money creditors would receive if non-exempt assets were liquidated as part of a Chapter 7 bankruptcy. Upon the completion of the court-ordered repayment schedule, any unpaid unsecured debts are discharged.

Choosing a Bankruptcy Chapter

Whether you choose bankruptcy chapter 7 or chapter 13 will be determined by the following criteria:

• your income,
• your ability to repay your debts, and
• where you live (exemption rules vary according to State).

Debts suggest you seek professional advice from a bankruptcy attorney to fully explore your options.

Five reasons to choose Chapter 13

Since Chapter 7 bankruptcy typically involves no payments, and Chapter 13 bankruptcy involves payments for up to five years, why would anyone choose to deal with their debts through Chapter 13? There are five typical answers.

1) In line with the Bankruptcy Reform Act of 2005, you cannot file for bankruptcy under Chapter 7 if your income is too high.

2) If concerned about a foreclosure on your home, a Chapter 13 Wage Earner Plan would present the best solution. While a Chapter 7 petition delays foreclosure, it does not prevent it and the property may still have to be sold to repay the mortgage debt. In a Chapter 13 bankruptcy, the person filing the Wage Earner Plan* may be able to negotiate with the mortgage holder to catch up in full on the mortgage arrears as part of the court approved repayment plan. Assuming the mortgage is brought up to date, the foreclosure is prevented.

3) A sense of moral obligation is often enough reason to apply for bankruptcy under Chapter 13 rather than Chapter 7. Debtors who fall into this category choose chapter 13 because they would rather honor the debt under a repayment plan.

4) A Chapter 13 Wage Earner Plan generally allows you to retain all of your assets you may otherwise lose under Chapter 7 bankruptcy.

5) If you have a regular income, you may not qualify to file under chapter 7 bankruptcy.

* A Chapter 13 Wage Earner Plan is a negotiated settlement between you and the people you owe money to (your creditors). It’s a deal that you make with your creditors as an alternative to bankruptcy. It is also known as a Chapter 13 bankruptcy.

Make yourself at home in our Forum and find out what everyone else thinks about bankruptcy in America. There is also our up-to-date News section for all the latest on personal finance. If you need help finding a provider or would like to review a company, please don’t go without checking out our A-Z directory.