What are the Differences Between Chapter 7 and Chapter 13 Bankruptcy?

Most bankruptcies filed in America are either Chapter 7 or Chapter 13 cases.

The type of bankruptcy under which you file depends on factors like your assets, debts, income and general financial goals.

Chapter 7 bankruptcy eliminates unsecured debts, including medical bills and credit card debts. However, you must have very little or no disposable income to qualify for Chapter 7, and if you do not pass the means test,you will be required to file Chapter 13 bankruptcy instead. In a Chapter 7 case, a trustee reviews your documents and sells non-exempt property back to your creditors.

Chapter 13 bankruptcy is a means of restructuring your debt to make it easier to pay off at least a portion of it. Its specifically meant for people who have too much money or too many assets to qualify for Chapter 7, while still offering many of the same benefits.

In Chapter 13, you keep all property, including non-exempt assets, in exchange for paying back either all or part of your debt through a repayment plan. The amount you pay back depends on your expenses, debts and income.

An overview of the differences between the two

Aside from the eligibility requirements, how exactly are Chapter 7 and Chapter 13 bankruptcy different? Here are a few examples:

Purpose: Chapter 7 bankruptcy is designed to liquidate assets and eliminate debts, whereas Chapter 13 simply reorganizes them to make them more manageable.

Who can file: Individuals and businesses alike may file for Chapter 7 bankruptcy, but only individuals (including sole proprietors) may file for Chapter 13 bankruptcy.

How long it takes: People who file Chapter 7 bankruptcy usually receive a discharge within three to five months. Under Chapter 13, however, this depends on how long it takes to pay off debts in accordance with the established repayment plan. Usually, it is more along the lines of three to five years.

What happens to property: In Chapter 7, trustees can sell non-exempt property to pay creditors. In Chapter 13, debtors can keep all their property, but must pay creditors of unsecured debts an amount equal to the value of those non-exempt assets.

Reducing principal loan balance: Chapter 7 bankruptcy does not allow you to reduce the principal loan balance on your secured debts via a loan “cramdown,” but Chapter 13 does, so long as you meet the requirements to do so.

Lien stripping: Chapter 7 does not allow you to remove unsecured junior liens from real property via lien stripping. Chapter 13 does, so long as you meet the requirements to do so.

For more information on the advantages and disadvantages of Chapter 7 and Chapter 13 bankruptcy, work with a skilled Brownseville bankruptcy attorney at Marcos D. Oliva, P.C.