Individuals can file for bankruptcy under chapter 7 or chapter 13. There are differences in the way these two chapters function. Bankruptcy attorneys of Dallas based law firm Recovery Law Group, highlight some of the common differences between the two chapters. This is essential for people to know which chapter would work best in their situation.
Chapter 7 Bankruptcy
This is also known as liquidation bankruptcy and is used to wipe out unsecured debts like credit card and medical bills. People whose income is less than the state median can file under this chapter. Filing for bankruptcy ensures that any collection actions like wage garnishment etc. are put on hold due to the automatic stay. The bankruptcy filer’s property is assessed and divided into the exempted and non-exempt property. The non-exempt property is used to pay back your creditors. In case there are no non-exempt assets, the creditors get nothing. This type of bankruptcy can also help people whose discharged debts are more than the value of the non-exempt property sold. Also, the trustee can use the proceeds of non-exempt property sale to clear non-dischargeable debts like income tax or alimony support.
Chapter 13 Bankruptcy
People who fail to qualify for chapter 7 bankruptcy have the option of filing for chapter 13 bankruptcy California . This bankruptcy chapter is also known as the wage earners plan and is for those debtors who have a regular income. The bankruptcy filer’s disposable income, assets, and debts are considered to come up with a repayment plan through which a portion of the debts is paid off every month for a period of 3 to 5 years. This chapter helps you catch up on any mortgage payments you missed, or completely get rid of unsecured junior liens from your home.
You also get to keep all your property including non-exempt ones after paying unsecured creditors, an amount equal to the value of non-exempt property. You can payback all or some portion of your debts through the repayment plan. This chapter can help people get debt relief, prevent wage garnishment, foreclosure, litigation against them, or lower credit card payments. People can pay off their non-dischargeable debts like child support arrears over a period of 3 to 5 years and catch up on missed car or house payments to keep their property.
In case you are considering filing for bankruptcy and are confused which chapter will work best for you, you can call 888-297-6023 to get free bankruptcy consultation. Here are some key differences between the 2 chapters:
| Chapter 7 | Chapter 13 | |
| Type of Bankruptcy | Liquidation | Reorganization |
| Who can file? | Individuals and business entities | Only for individuals and sole proprietors |
| Eligibility criteria | Disposable income low should pass the means test | Unsecured debt should not exceed $419,275 and secured debt should not be more than $1,257,850 |
| Timing of discharge | Usually 3-4 months | On completion of the repayment plan (3-5 years) |
| Fate of property | Non-exempt property is sold off by the trustee to pay creditors | Can keep all property but pay an amount equal to the non-exempt property to unsecured creditors |
| Is lien stripping allowed? | No | Yes, if the requirements are met |
| Is principal loan balance on secured debts reduced? | Yes, in case of tangible personal property only | Yes, if all requirements are met |
| Benefits | Quick discharge of qualifying debts | Can keep all property, catch up on missed payments (car, mortgage, and other non-dischargeable priority debts |
| Drawbacks | Non-exempt property is sold off by trustee; cannot catch up on missed payments to prevent repossession or foreclosure | Continue making payments to the trustee as per repayment plan for 3-5 years duration; might have to pay back some general unsecured debts |