Chapter 7 vs. Chapter 13 – some differences

CHAPTER 7

When people think about bankruptcy, they usually think about a Chapter 7 Bankruptcy.  In Chapter 7 the debtor asks the bankruptcy court to discharge most of the debts owed.  In exchange , the bankruptcy trustee can “liquidate” or seize and sell any property that is not exempt (ie, protected).  The proceeds are used to pay back unsecured creditors.

There are several requirements to be eligible to file a Chapter 7 including the ability to pass the income-based means test.   Additionally, to file a Chapter 7 petition a debtor will be required to provide evidence of the debtor’s finances including, but not limited to, copies of recent tax returns; a list of all creditors and the amount and nature of their claims; the source, amount, and frequency of the debtor’s income; and a list of all of the debtor’s property.

Chapter 7 allows the Debtor a quick and clean fresh start. If the debtor does not have any nonexempt assets and is only trying to discharge debt, it can provide  great relief to those who qualify.

CHAPTER 13

A debtor that has nonexempt assets can be better off filing a Chapter 13 petition to protect those assets. In Chapter 13 bankruptcy, the debtor agrees to a repayment plan with the bankruptcy court in order to pay back all or a portion of the debts over time. The amount that will have to be repaid depends on the amount of debtor’s income, the amount and types of debt owed, and how much property the debtor owns.

Typically, no property is taken from the debtor in Chapter 13 bankruptcy because the repayment plan is funded by the debtor’s income rather than a liquidation of assets.  Most assets are protected in a Chapter 13 bankruptcy. In certain situations a Chapter 13 bankruptcy can even help save assets that the debtor put up as collateral for a loan- such as a house or car- that are are in danger of being subject to repossession or foreclosure.

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