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What are the differences between Chapter 7 and Chapter 13 for individuals?

  • By: John Clark
  • Published: June 30, 2020
What are the differences between  Chapter 7 and Chapter 13 for individuals?

In chapter 7 your assets and liabilities are essentially “frozen” with the filing of the bankruptcy petition. You keeps the “exempt” property/assets. The bankruptcy trustee takes the non-exempt property/assets and liquidates that property. The trustee then distributes the proceeds of the liquidation of the non-exempt property/assets to your existing unsecured creditors. You are then relieved (discharged) of the duty to pay most existing debts and your future earnings cannot be seized by the existing creditors. Lenders with loans on a house or vehicle are either paid as agreed or the items are surrendered to the lender.

Chapter 13 instead focuses on your future income rather than your existing property and assets. In a Chapter 13, you keep all of your property and assets and pay your creditors out of your future income through a “plan.” Monthly payments are made to the bankruptcy trustee. The bankruptcy trustee takes those payments and, in turn, pays your “secured” debts (home mortgage, car loan, etc.). Then, if there is money left over after payment to the secured creditors, the trustee pays the remaining disposable income to your existing unsecured creditors based on your plan. The court-approved plan lasts for 3 to 5 years. At the end of the plan the balance of the unpaid debts included in the plan are forgiven (discharged).

Please note that some debts survive the chapter 7 or chapter 13 process – such as student loans and certain taxes.

A few debtors must file chapter 13 because they earn too much money to qualify for a chapter 7. The “means test” required by the Bankruptcy Code will help determine if you qualify for a chapter 7.

Even if you don’t qualify for a chapter 13, there is still some positive news. A chapter 13 reorganization offers individuals a number of advantages over liquidation under chapter 7, including (a) the opportunity to save your home from foreclosure; (b) the election to reschedule secured debts (other than a mortgage for your primary residence) and extend those debts over the life of the chapter 13 plan (either 3 or 5 years); (c) the ability to potentially “strip” away junior liens from property; (d) extending “automatic stay” protections to third-parties who are liable with you (co-debtors or co-signers) on “consumer debts;” and (e) acting as a consolidation loan under which you make the plan payments to the chapter 13 trustee who then distributes payments to your creditors – meaning you will have no direct contact with creditors while under chapter 13 protection.

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