Difference Between Chapter 7 and Chapter 13 Bankruptcy
Note: The following is for education purposes. For legal advice please speak to a licensed attorney in your state. Chapter 7 and Chapter 13 are the two most common bankruptcies used by consumers under the United States Bankruptcy Code. Both have advantages and disadvantages and the chapter utilized is dependent on the individual's particular circumstances. This article is an attempt to clearly delineate the difference between Chapter 7 and Chapter 13 bankruptcy, so you can make the best financial decision for your situation.
As part of any decision regarding debt relief, you are encouraged to learn about debt settlement as an alternative to Chapter 7 and Chapter 13 bankruptcy. Start now by submitting a form to speak with a consultant.Chapter 7
Under a Chapter 7, the party provides a list of property to the Court. Property that is exempt by law is retained by the debtor. Exempt property is determined by the bankruptcy code or the debtor's state law. What is exempt property varies from state to state.
The biggest difference between Chapter 7 and Chapter 13 banrkuptcy is nonexempt property is turned over to the bankruptcy trustee. Common forms of nonexempt property are cash, funds in nonretirement bank accounts, money owed to the debtor, second vehicles, and in some cases, excess equity in a home. The trustee will then sell the property and distribute the proceeds to the creditors.
Most of the debtor's debts are then discharged, or forgiven. Not all debts are forgiven, or termed nondischargeable. Common types of debts not forgiven are child support and alimony debts, student loans, recent tax obligations and criminal penalties. Since 2005, debtors in a Chapter 7 are required to file a "means test". They are required to show that, based on their current and projected budgets, that there will be no funds available to fund a Chapter 13 repayment plan.
Chapter 13
Under Chapter 13, a debtor files a proposed repayment plan with the court. The repayment plan will last for 3-5 years. Like a Chapter 7, the debtor will file a list of exemptions with the court, but the difference between Chapter 7 and Chapter 13 is the debtor repays the debt from their disposable income, not their unexempt property.
Though recent taxes are not dischargeable in a Chapter 13, the debtor may repay those taxes through the plan without incurring additional interest or penalties. If the debtor is behind on mortgage payments, a Chapter 13 allows the debtor to catch up past due payments through the plan.
The debtor will be granted a discharge upon completion of the plan. More debts can be forgiven in a Chapter 13 than in a Chapter 7. For instance, non child support or maintenance debts owed through a divorce case are not forgiven in a Chapter 7 case, but may be forgiven in a Chapter 13.