What is the difference between Chapter 7 and Chapter 13?
When faced with financial difficulties, individuals and businesses often turn to bankruptcy as a means of relief. Bankruptcy laws in the United States offer two primary chapters, Chapter 7 and Chapter 13, which cater to different financial situations. Understanding the differences between these chapters is crucial for those seeking bankruptcy protection.
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is designed for individuals and businesses who are unable to repay their debts. Under Chapter 7, a trustee is appointed to liquidate the debtor’s non-exempt assets to pay off creditors. The remaining debts are then discharged, meaning the debtor is no longer legally obligated to repay them. Here are some key points about Chapter 7 bankruptcy:
– Debtors must pass the “means test” to qualify for Chapter 7. This test evaluates the debtor’s income and expenses to determine if they can afford to repay their debts.
– Certain assets, such as a primary residence, a car, and personal belongings, are exempt from liquidation under state or federal law.
– Chapter 7 bankruptcy can be completed relatively quickly, often within three to six months.
– Debtors may not file for Chapter 7 bankruptcy again for eight years.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy, also known as a wage earner’s plan, is designed for individuals with a regular income who wish to keep their property while repaying a portion of their debts over a period of three to five years. Under Chapter 13, debtors propose a repayment plan that is approved by the bankruptcy court. Here are some key points about Chapter 13 bankruptcy:
– Debtors do not need to pass the means test to qualify for Chapter 13, as long as they have a regular income.
– Debtors can keep all of their property, including non-exempt assets, as long as they comply with the repayment plan.
– Chapter 13 bankruptcy allows debtors to repay a portion of their unsecured debts, such as credit card debt, medical bills, and personal loans, over a longer period.
– Debtors may file for Chapter 13 bankruptcy again after four years, provided they have not previously filed for Chapter 13 or Chapter 7 within the past six years.
Conclusion:
In summary, the main difference between Chapter 7 and Chapter 13 bankruptcy lies in the eligibility requirements, the treatment of assets, and the repayment process. Chapter 7 is suitable for individuals and businesses with little to no income and minimal assets, while Chapter 13 is better suited for those with a regular income and the desire to keep their property. It is essential for debtors to consult with a bankruptcy attorney to determine which chapter is the best option for their specific financial situation.
