As a debtor, knowing the right kind of bankruptcy case for you is recommended to your advantage. Since most of the bankruptcy cases filed in the U.S. fall under Chapter 7 or Chapter 13, you might be wondering about the differences between Chapter 7 and Chapter 13 bankruptcy.
So which bankruptcy case is the right one for you?
Under the Title 11 of the United States Code or most often referred to as the Bankruptcy Code, Chapter 7 bankruptcy is also entitled as “Liquidation” and Chapter 13 as the “Adjustment of Debts of an Individual with Regular Income”.
In short, the major line that divides Chapter 7 as well as Chapter 13 is the income level of the debtor.
Basic differences of Chapter 7 and Chapter 13 explained.
Between the two bankruptcy chapters, Chapter 7 is much simpler and takes lesser time when filing compared to Chapter 13. It is also a known fact that about 71% of filed bankruptcy cases are filed under Chapter 7 while the rest of the remaining percentage are divided to Chapter 13 as well as other bankruptcy chapters.
Because Chapter 7 bankruptcy is designed as liquidation, debtors who will file under this chapter have the chance to be discharged of most or all of their debts with the help of the bankruptcy. In exchange for this, the bankruptcy trustee will also take any non-exempt property from the debtor and sell it so that the proceeds of the said property can be used to pay off your creditors. Debtors who have very little or no disposable income at all can easily qualify for a Chapter 7 bankruptcy so that once their debts are discharged, they can start afresh with a clean financial slate.
On the other hand, a debtor who still makes enough and much money to pay off their debts would be referred to file under the Chapter 13 bankruptcy.
It is already established from the first part that Chapter 13 deals with debt reorganization. That is, a debtor has to come up with a monthly repayment plan that could go on years until they could pay back their debts. A debtor’s level of income also plays an important role in Chapter 13. This is because the monthly payments are determined according to the monthly income that the debtor’s get. The amount as well as type of debts owed are also put in consideration. Unlike Chapter 7, a debtor is not set to lose any property when filing for bankruptcy under Chapter 13.
Other differences between Chapter 7 and Chapter 13 bankruptcy
Aside from the general differences mentioned above, there are also other differences that debtors should note between Chapter 7 as well as Chapter 13 bankruptcy. These are the following:
- Bankruptcy limitations – because Chapter 7 totally discharges debtor’s debt so they are no longer liable to pay off their creditors, a debtor must pass the Means Test – an income-based assessment to evaluate a debtor’s financial situation – to qualify for a bankruptcy case under Chapter 7. If ever a debtor fails the test, then it is the time for them to file their cases under Chapter 13. Also, individuals including sole proprietors are the only ones eligible to file for a Chapter 13 bankruptcy whereas business entities aside from individuals can file for Chapter 7.
- Discharges – though there are some debts that cannot be discharged like mortgages which are property liens, almost all types of personal debts are granted a discharge under Chapter 7. A debtor’s liability to creditors ends once the courts issues a final discharge order of the debts. Chapter 13, on the other hand, strictly requires the completion of payments which might take up up to 5 years before a debt can be considered discharged unlike under Chapter 7 where a court can issue a debt discharge for up to three to five months upon filing.
- Properties – in the case of Chapter 7, debtors are required to keep up paying their mortgages as well as car loans if applicable or else you have to return the properties back to the creditors. Under Chapter 13, debtors are allowed to keep their houses, cars as well as other similar properties as long the repayment plan is followed.
- Non-exempt assets – in exchanged for total debt discharge, debtors who file their cases under Chapter 7 must surrender all non-exempt assets for distribution to pay off creditors. With Chapter 13, non-exempt assets remain secure as well as intact unless a debtor fails to complete their repayment plan.
- Bankruptcy trustees – Chapter 7 bankruptcy trustees are responsible for handling the sales of debtor’s properties and distributing the proceeds to owed creditors. A Chapter 13 bankruptcy trustee together with the debtor is tasked to develop a proposal for a repayment plan which protects the interests of both the debtor’s as well as the creditor’s.
- Time to repay – since most debts under Chapter 7 bankruptcy are discharged, debtors do not have to worry about the time it would take them to repay their debts. On the one hand, it would take a debtor at least three years, with a maximum of five years, to repay creditors with a monthly repayment plan.
- Bankruptcy conclusion – once the bankruptcy court issues a final discharged order, then a bankruptcy case is concluded under Chapter 7. With Chapter 13 however, the debtor must ensure that all his payments are done in accordance to the court-approved repayment plan; then and only then will the bankruptcy court issue an order for the conclusion of the bankruptcy.
- Credit ratings – both of the bankruptcy chapters 7 and 13 have an effect on a debtor’s credit ratings. As a rule of thumb, bankruptcy records would remain on the debtor’s credit record for a length of 10 years starting from when the bankruptcy case was filed.
As a debtor, knowing the differences between the two bankruptcy chapters will allow you to choose which one is better and is more applicable to your financial situation. Since filing for a bankruptcy case can be a complex process, debtors must take a more guided approach through a legal counsel like a bankruptcy attorney to help as well as assist with the bankruptcy case.