Chapter 7 vs. Chapter 13 Bankruptcy

What’s the Difference Between a Chapter 7 and Chapter 13 Bankruptcy

Most bankruptcies filed are either Chapter 7 or Chapter 13 cases. Whether a Chapter 7 or Chapter 13 bankruptcy is the right choice for you depends on your income, assets, debts, and your financial goals. Check out our handy table which highlights the differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy – In General

Chapter 7 is a liquidation bankruptcy designed to wipe out your general unsecured debts such as credit cards and medical bills. To qualify for Chapter 7 bankruptcy, you must have little or no disposable income. If you make too much money, you may be required to file a Chapter 13 bankruptcy.

When you file for Chapter 7 bankruptcy, a trustee is appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your nonexempt property to pay back your creditors. If you don’t have any nonexempt assets, which is the case for most filers, your creditors receive nothing.

Chapter 13 Bankruptcy – In General

Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who can pay back at least a portion of their debts through a repayment plan. If you make too much money to qualify for Chapter 7 bankruptcy, you may have no choice but to file a Chapter 13 case. However, many debtors choose to file for Chapter 13 bankruptcy because it offers many benefits that Chapter 7 bankruptcy does not such as the ability to catch up on missed mortgage payments or strip wholly unsecured junior liens from your house.

In Chapter 13 bankruptcy, you get to keep all of your property including nonexempt assets. In exchange, you pay back all or a portion of your debts through a repayment plan (the amount you must pay back depends on your income, expenses, and types of debt). For this reason, Chapter 13 is commonly referred to as a reorganization bankruptcy. Typically, Chapter 13 bankruptcy is for debtors who can afford to make monthly payments to get caught up on missed mortgage or car payments or pay off nondischargeable debts such as alimony or child support arrears.

Basic Differences Between Chapter 7 and Chapter 13 Bankruptcy

 

 

Chapter 7

Chapter 13

 

Type of Bankruptcy

Liquidation

Reorganization

Who Can File?

Individuals and Business Entities

Individuals Only (Including Sole Proprietors)

Eligibility Restrictions

Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Test

Cannot Have More Than $383,175 of Unsecured Debt or $1,149,525 of Secured Debt

How Long Does It Take to Receive a Discharge?

Typically Three to Five Months

Upon Completion of All Plan Payments (Usually Three to Five Years)

What Happens to Property in Bankruptcy?

Trustee Can Sell All Nonexempt Property to Pay Creditors

Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets

Allows Removing Unsecured Junior Liens from Real Property Through Lien Stripping?

No

Yes (If Requirements Are Satisfied)

Allows Reducing the Principal Loan Balance on Secured Debts Through a Loan Cramdown?

No

Yes (If Requirements Are Satisfied) (Learn about cramdowns in bankruptcy.)

Benefits

Allows Debtors to Quickly Discharge Most Debts and Get a Fresh Start

Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments

Drawbacks

Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession.

Must Make Monthly Payments to the Trustee for Three to Five Years. May Have to Pay Back a Portion of General Unsecured Debts.

 Free Consultation

The Law Office of Erin Bradley McAleer will fight to ensure that you achieve the best possible outcome in your case. Call us today at (360) 334-6277 to schedule a free, confidential consultation.

The Law Office of Erin Bradley McAleer represents clients throughout Southwest Washington State, including in Clark County, Cowlitz County, and Skamania County and Vancouver, Battle Ground, Camas, La Center, Ridgefield, Washougal, Woodland, Yacolt, Castle Rock, Kalama, Kelso, Longview, North Bonneville, and Stevenson.

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