Chapter 7 vs. Chapter 13 Bankruptcy
If debt repayment becomes a hassle and you can’t keep up with credit card bills, filing for a bankruptcy may represent the ideal solution to get you out of financial trouble. And there are two common options – the Chapter 7 and Chapter 13 bankruptcy – you can leverage to get out of debt.
Both bankruptcy programs have their pros and cons and eligibility rules, meaning that both options are not for everyone. Let us consider the highlights of Chapter 7 and Chapter 13 bankruptcy to help you decide the most suitable option for your financial situation.
Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 bankruptcy is designed to discharge or wipe out most of your unsecured debt such as medical and credit card bills without the need for a repayment plan to pay back any balances. When you file for Chapter 7 bankruptcy, an order known as “automatic stay” immediately takes effect, preventing most creditors from pursuing debt collection plans.
A bankruptcy trustee is also appointed for the management of your case. The job of the trustee is to review your bankruptcy-related documents and sell your nonexempt assets (your property that cannot be protected via a bankruptcy exemption) to pay off your debt. But if you do not have any property, your creditors will not receive anything.
However, there are income requirements that qualify an individual to file for Chapter 7 bankruptcy. If you are a high-income earner, you will have to file for bankruptcy under Chapter 13. Chapter 7 bankruptcy is especially suitable for debtors with limited income and with little to no assets. It is also available for those whose discharged or liquidated debt surpasses the value of the sold property, especially if the bankruptcy trustee is to ensure the funds have a bearing on non-dischargeable debt.
Chapter 13 Bankruptcy
Chapter 13 is also referred to as reorganization bankruptcy and it is generally meant for debtors with regular income who have just enough funds at the end of every month to pay back at least some portion of their debt via a repayment plan. Although Chapter 13 bankruptcy filers receive more than enough income that qualifies them to file for Chapter 7, most debtors prefer Chapter 13 bankruptcy due to the many benefits on the program that are not available on Chapter 7 bankruptcy.
A major upside of Chapter 13 bankruptcy is that you can keep all of your assets – including nonexempt property. However, you will still have to pay your creditors an amount that is equal to the value of your nonexempt asset. Instead, you will have to pay back a portion or all of your debt through a repayment plan – with the amount you are to pay largely depending on you’re the type of debt, your income, and expenses.
Once your repayment plan is complete over the agreed period of time, any leftover unsecured debts such as medical and credit card bills may be discharged. This means that you are no longer required to pay off any debt.
Beyond the income level of a debtor, there are still differences between Chapter 7 and Chapter 13 bankruptcy that could be confusing for a debtor. Here are a few highlights:
Car Loans and Mortgages
- Chapter 7: Under Chapter 7 bankruptcy, you will probably return the car or house to your creditor or agree to an arrangement that allows you pay the wholesale value of the item.
- Chapter 13: You can keep the car or house under Chapter 13 if you follow a court-mandated payment plan.
Debts Due to Past Crimes
- Chapter 7: If your creditor objects to the discharge of your debts and can provide proof of your prior act, your debt will likely not be wiped out.
- Chapter 13: Although the debt will be added to your repayment plan, the balance may be discharged if your outstanding debts have not been fully paid at the end of Chapter 13 bankruptcy.
- Chapter 7: If you have debts as a result of student loans, child support, or alimony, you will not be discharged.
- Chapter 13: If these debts are not cleared off at the end of Chapter 13 bankruptcy, you will still have to pay off the balance.
- Chapter 7: If you have debts owed as a result of a property settlement or divorce and the creditor objects to a discharge, your debt will not be wiped off unless you can prove that:
- It will still be impossible to pay off the debt after Chapter 7 bankruptcy.
- Wiping off the debt is more important than the damage caused to the creditor.
- Chapter 13: Any non-support debt balance at the end of Chapter 13 bankruptcy will be discharged.
If you are still confused about Bankruptcy and have questions, please get hold of Roxane Kaye for a no-obligation consultation regarding your needs to see if we can help you.
About the Author: Roxane Kaye, has been practicing law since 2002. She is admitted to practice law in Michigan state courts and before the Federal Bankruptcy Court of Eastern Michigan, Southern Division, as well as the Federal District Court of the Eastern District of Michigan.