Understanding the difference between Chapter 7 and Chapter 13 bankruptcy

Chapter 7 and Chapter 13 bankruptcy. What is the difference between the two? Which one is more beneficial to your situation? If you listen to the legal and financial jargon, it can get complicated. Let us look at the two types of bankruptcies in the simplest manner possible, in a way a non-lawyer understands.

Chapter 7 bankruptcy:

      1. You should not have minimal disposable income.
      2. Chapter 7 Bankruptcy can discharge you from repaying unsecured debts like credit card dues, medical debts, pay day loans, personal loans, and so on. However, mortgages and vehicle loans should not be included unless you wish to surrender the property.
      3. You must turn over non-exempt property to the Chapter 7 trustee who will sell the property and appropriate the proceeds towards the liquidation of your unsecured loans.  Most debtors have few if any non-exempt property except for their next year’s tax refunds.
      4. Under such circumstances, the trustee must pay the exempt amount to you and adjust the excess amount towards the repayment of the unsecured debts. For example, the exemption for a vehicle in Colorado is $7500. If your vehicle is paid-off and is worth, $20,000, the trustee would sell the vehicle, pay you $7500 from the sale and use the remaining proceeds to pay down your debts.  
      5. Creditors can seek payment from the co-debtor.
      6. In case the creditor proves you had obtained debts by fraud, the creditor can object to the discharge of their debt with you.

Chapter 13 bankruptcy

      1. Your disposable income should not be sufficient to cater to your loan repayments.
      2. This is a reorganization bankruptcy. You still get a discharge from your unsecured debts, but have to agree to a repayment schedule over a period of 3 to 5 years depending on your disposable income. Your secured loans continue as they are, unless you wish to surrender the collateral. You get the chance to retain your property provided you adhere to the court order.
      3. You can retain possession of non-exempt property provided your creditor receive as much from a chapter 13 as they would from a chapter 7 liquidation. This is known as the chapter 7 reconciliation. This is usually not an issue for most debtors.
      4. Creditor cannot seek repayment from the co-debtor for the entire duration of the bankruptcy.

Similarities between Chapter 7 and Chapter 13

      1. Student loans are usually not discharged. In case of Chapter 13, this liability remains even after the expiry of the bankruptcy period.
      2. Child support, alimony, and divorce settlements are also not dischargeable under both bankruptcies.

Certain facts to know and understand:

      1. Chapter 7 should be a one-time facility. If there has been a prior bankruptcy proceeding, you cannot opt for Chapter 7 unless the prior chapter 7 bankruptcy was filed over eight years ago.
      2. In case the court finds out that you have sufficient income for filing Chapter 13 bankruptcy, it can dismiss the Chapter 7 proceeding. You have the option to convert it into a Chapter 13 bankruptcy.
      3. You can re-file a Chapter 13 bankruptcy.
      4. You cannot avoid paying child support, alimony, and divorce related payments under any bankruptcy.
      5. The best person to advise you under these circumstances is the bankruptcy attorney.  

You have just seen the difference between a Chapter 7 and Chapter 13 bankruptcy. In case you are eligible, consult your attorney and proceed accordingly. Statistics show that 71% of cases are Chapter 7 cases whereas Chapter 13 accounts for 29%.