Difference between Chapter 7 and Chapter 13 Bankruptcy
The prospect of filing bankruptcy can be intimidating, especially when it becomes a reality. When finances are so out of control that filing bankruptcy becomes a viable option, it’s important to understand as much about the process as possible.
While only a licensed attorney may advise you about bankruptcy issues, we offer the following general information. If you have any questions or concerns regarding bankruptcy, please contact a licensed attorney in your jurisdiction.
Individual consumers with overwhelming personal debt who file for bankruptcy can generally file for either Chapter 7 or Chapter 13 bankruptcy. Other chapters, such as Chapter 11, are options for insolvent businesses and other entities.
In either case, detailed paperwork is generally required. Income, assets, expenses, debts, personal background and financial information may be examined. Also, you may need to provide a certificate of completion of a credit counseling program, tax returns from the latest tax year, and proof of income.
The Means Test
The bankruptcy process begins with a “means test.” This test determines whether you will qualify for Chapter 7 bankruptcy, which typically eliminates all of your debts, or Chapter 13 bankruptcy, which helps you repay your debt through a repayment plan.
The means test calculates how your income compares to the median income of your state. If your income is higher than the state median, another set of calculations will conclude if you will file for a Chapter 7 liquidation or Chapter 13 repayment bankruptcy. If you fail to qualify for a Chapter 7, then you will get a Chapter 13.
The Chapter 7 Bankruptcy Process
In a Chapter 7 case, you generally meet with creditors shortly after filing for bankruptcy. A court-appointed trustee will figure out which of your assets can be sold (liquidated). The profit from liquidating your assets is split among your various creditors. Some of your assets may be exempt from liquidation, like your primary home.
After the liquidation, the court determines whether to discharge your debts and how much should be discharged.
Because creditors only receive a portion of the profits from selling your property, they are not likely to recoup their losses. For this reason, many creditors do not want consumers to file for bankruptcy. In fact, there are many cases where creditors favor debt settlement as an alternative, which makes it easier for us at Debt Shield to negotiate for you.
The Chapter 13 Bankruptcy Process
With a Chapter 13 bankruptcy, the court may approve a repayment plan that you submit to them. The court-appointed trustee will sort all your payments and send them to the creditors. After the repayment is complete, your debts are generally discharged.
Although the court ultimately decides which bankruptcy you file, you may prefer a Chapter 13, which lets you keep valuable assets, such as your home. On the other hand, legal fees tend to be higher because Chapter 13 bankruptcies can be more complex, requiring more time and paperwork. The repayment plan typically takes 3 to 5 years to complete.
Debt Shield’s program may allow you to pay off your unsecured debts, usually within 2 to 5 years, and at a considerably reduced amount.
Not All Debts Are Discharged
In addition to the variations between a Chapter 7 and a Chapter 13, you must consider which types of debt are not dischargeable under bankruptcy. Federal, state and local taxes are still due. Your federal tax debt might be absolved with a bankruptcy if it is an amount due from over 3 years ago. State and local taxes are subject to other time constraints.
Most student loans, spousal support, child support, secured debts, government-imposed fees and penalties and other types of debt would not be discharged in a bankruptcy. Also, you will be held accountable for debts not listed on the forms and schedules submitted to the bankruptcy court. With these debts that cannot be discharged, you still owe the amount, and the creditors are still permitted to collect from you with methods such as garnishment.
Disclaimer: Debt Shield, Inc is not a law firm and under no circumstances should the information on this page or website be construed or relied upon as legal advice. If you need legal advice, you should contact an attorney licensed to practice law in your state.
