Key Differences between Chapter 7 and Chapter 13 Bankruptcy

Written by Posted On Friday, 02 October 2020 07:30
Key Differences between Chapter 7 and Chapter 13 Bankruptcy Key Differences between Chapter 7 and Chapter 13 Bankruptcy pixabay.com

Desperate to get out of debt? Filing for bankruptcy may be the best solution. Before getting paperwork together, it's wise for consumers to know their options, though. Read on to find out about the key differences between chapter 7 and chapter 13 bankruptcy, the two debt relief programs available to consumers.

Type of Bankruptcy

When most people think of bankruptcy, they're thinking of chapter 7. This is a traditional liquidation bankruptcy, meaning that after the filing process has been completed and the application is approved, eligible debts will be discharged. Chapter 13 allows consumers to reorganize debts instead of discharging them.

Eligibility Requirements

Consumers who choose to file chapter 7 bankruptcy will have to pass a strict means test that shows they will be unable to pay off their debts without incurring unacceptable hardship. Those filing chapter 13 bankruptcy don't need to pass a means test. Instead, they'll have to meet other eligibility requirements, including:

  • Having regular income
  • Being current on tax filings
  • Having unsecured debt that does not exceed $394,725 and secured debt that does not exceed $1,184,200
  • No recent history off bankruptcy filings within the past two years
  • No dismissed bankruptcy petitions within the past 180 days

 

What Happens to Property?

Hime Property

When consumers file for chapter 7 bankruptcy, they will lose their nonexempt property, which can include vehicles with equity, investment assets, properties that are not primary dwellings, valuable artwork, jewelry, or clothing, and even musical instruments. When filing for chapter 13, debtors can keep their property and set up repayment plans to pay creditors the value of the non-exempt assets over time.

Time to Receive a Discharge

Chapter 7 bankruptcy allows filers to have their debts discharged very quickly, usually within three to four months. It takes longer to discharge debts by filing for chapter 13 bankruptcy, as debtors must complete their reorganized payment plans. In most cases, this takes between three and five years.

Reductions of Principal Loan Balance

Both chapter 7 and chapter 13 bankruptcy filers may be eligible to have the principal balances on their secured loans reduced. For chapter 7 bankruptcy, only secured debts on tangible personal property can be reduced. For chapter 13, the principal balance will only be reduced if certain requirements are satisfied.

What's Required?

Those who plan to file for either form of bankruptcy will need to do some legwork before submitting paperwork. The best way to get started is to hire a bankruptcy attorney. He or she will be able to help clients compile relevant personal financial information like bank statements, proof of income, and property deeds, lists of creditors and the natures of their claims, and lists of monthly living expenses. Plus, a lawyer can negotiate with creditors more effectively than the debtor him- or herself.
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The Bottom Line

Filing for bankruptcy should be considered a last resort, but that doesn't mean debtors should feel ashamed of the position they are in or that they should have to go it alone. Find a lawyer now to learn more about chapter 13 and chapter 7 bankruptcy.

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