Many people struggle for years under mountains of debt, never dreaming that bankruptcy could help them to get back on their feet again. Many people are reluctant to seek legal advice when they’re considering bankruptcy because they look at it as one more bill they’ll owe, not as a way to get out from under their nagging debts. While bankruptcy laws are complex, and there are many different kinds of bankruptcy, for the most part, the average person only needs to know about Chapter 7 and Chapter 13 bankruptcy proceedings to determine if bankruptcy is right for them. It costs money to hire a bankruptcy attorney, and there are other more personal consequences for declaring bankruptcy, but knowing what the benefits and downsides are beforehand can make your decision easier. Here’s a rundown of the main differences between Chapter 7 and Chapter 13 Bankrutpcy:
What Is Bankruptcy?
Bankruptcy is a process available to people in federal courts that can offer you protection from debt collection while you work out a payment plan for your debts. It can partially or totally wipe out your debts in certain cases. Individuals almost always file either a Chapter 13 or a Chapter 7 bankruptcy petition to the court, and the act of filing entitles you to immediate relief from all debt collection activity until your case is decided.
The bankruptcy proceedings are not the only aspect of bankruptcy you need to consider. Bankruptcy can give you a new start without the crushing debt load you’re currently carrying, but it can have many downstream effects on your ability to borrow money, buy a house or a car, or even get a job or rent an apartment. That’s why it’s wise to talk to a qualified bankruptcy attorney in order to determine if bankruptcy is right for you. In many cases, there are other ways to work out debts with your creditors without declaring bankruptcy.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is more like a structured repayment plan than a liquidation of all your debts. If you have regular income, have substantial equity in a home, and have unsecured and secured debt below certain dollar limits, you may be able to declare Chapter 13 bankruptcy to get relief from creditors while you work out your finances.
Chapter 13 doesn’t liquidate all your assets in order to pay your debts. The court trustee will review your income, assets, and debt load in order determine a workable payment plan for you to pay back your creditors. The trustee only accepts or rejects your plan for repayment, and then implements it. Your attorney, accountant, and you draw up the plan. Chapter 13 protects you from foreclosures and any debt collection activity for as long as you make timely payments on the plan directed by the court. The court has wide latitude to forgive parts of your debts, and to rank your creditors for the order of repayment. In any case, filing a Chapter 13 bankruptcy stops all collection activity immediately. Chapter 13 also protects co-signers on any of your loans. It can take three to five years to fully go through the bankruptcy process, and it stays on your credit and court records for seven years.
In Chapter 13, you make one payment a month directly to the trustee who is appointed by the court to handle your case, and the trustee pays your creditors for you. Taxes, child support, alimony, and other important bills are paid first, with other creditors forced to wait for their money as your debts are resolved.
What Is Chapter 7 Bankruptcy?
In some ways, Chapter 7 bankruptcy is easier, and in other ways, more difficult for the person filing the petition. It is the most severe form of bankruptcy available to the average person, and it involves a petition to wipe out almost all your debts. In Chapter 7, you lose almost all say in what happens with your existing assets, and the court can liquidate anything you own in order to satisfy as many debts as possible for your creditors. There’s a means test given to determine if you should be allowed to liquidate debts that you might have the ability to repay, and if it’s determined that you should be able to pay back all or some of your debts based on your income or assets, your petition for a Chapter 7 bankruptcy will be denied.
There are certain loans that cannot be discharged in Chapter 7 proceedings. Mortgages and car loans are backed by real property, and the lender can repossess them, although they won’t be able to continue debt collections for any balance owed. Federal student loans and tax liabilities can also not be liquidated in Chapter 7.
Chapter 7 offers instead relief from creditors, and once you’ve filed, all collection activity must stop permanently. You submit a detailed report of all your assets and debts, and then a hearing is held where the trustee decides what assets will be liquidated, which debts forgiven, and what you’ll be allowed to keep. Once your case is decided, you’re free from your former debts, although a Chapter 7 bankruptcy can remain on your credit records for up to 10 years.