A brief comparison of Chapter 7 and Chapter 13 bankruptcy
Often, when bankruptcy is discussed it’s referred to in the monolithic. It’s therefore important to understand that different forms of bankruptcy are available for different types of filers and circumstances. The main forms of personal bankruptcy are Chapter 7 and Chapter 13 bankruptcy, and the difference in choice usually depends on the filer’s income and the assets he or she would like to protect.
Both forms of personal bankruptcy have common characteristics. Those characteristics include:
- Automatic stop
- Discharge of debt
- Protection of property
The automatic stop prohibits collection attempts by creditors, which includes stopping foreclosures, garnishments, repossessions, evictions and utility shutoffs. The automatic stop occurs as soon as the bankruptcy petition is filed and gives the filer time and space to settle debt issues during the bankruptcy process. Creditors that violate the stop face contempt of court, including damages and attorney’s fees.
The discharge of debt, particularly unsecured debt, is the central purpose of bankruptcy. A discharge of debt through bankruptcy eliminates the filer’s personal obligation to pay the debt and the creditor may no longer force the filer to pay. However, certain debts may not be discharged.
Bankruptcy also offers protection of property and income. Bankruptcy protects property from unsecured creditors and, through exemptions, may protect the filer’s most important pieces of property, such as a home or car. Bankruptcy can also protect a filer’s income by preventing garnishment.
While both forms of personal bankruptcy provide the filer with the chance to make a fresh financial start, there are important differences. In a Chapter 7 bankruptcy, the trustee will liquidate or sell certain property. The trustee will use the proceeds of the sale to pay creditors. However, property that is classified as exempt will not be sold by the trustee. After approximately 100 days, the filer’s unsecured debt will be discharged, but secured debts, ones in which the filer promised collateral, may not be discharged. Moreover, bankruptcy allows the filer to discharge only the debts listed as a part of the case. An individual may generally file for Chapter 7 bankruptcy if he or she meets a means test. Normally, Chapter 7 is filed if the individual has mostly consumer debts.
Chapter 13 bankruptcy is significantly different than Chapter 7. To begin, in order to file, an individual must have regular income. Regular income includes not only payment for work but can also include rental income and benefit payments, such as unemployment benefits. Second, a filer may not have debts over a certain amount. Unlike Chapter 7, Chapter 13 bankruptcy allows the filer to keep his or her property if the filer makes payments over time according to a court-approved plan. During Chapter 13, a repayment plan of three to five years is created with the trustee. During the plan, the filer uses his or her income to pay a portion of the debt. Payments are made with the trustee who then distributes the payments to creditors. The payments under the plan must be at least as much as creditors would have received in a Chapter 7 case. At the end of the payment plan, any remaining debt is discharged.
If you are stressed by unmanageable debt, contact an experienced bankruptcy attorney to discuss what options are available and are appropriate for you.