What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Many people might look into bankruptcy as a way to alleviate financial pressures. But before you look into bankruptcy, you should understand the key differences between and ramifications of Chapter 7 and Chapter 13 bankruptcies.
Other People Are Reading
-
Identification
-
When a person is facing serious financial trouble, bankruptcy may be the only solution. While bankruptcy laws vary from state to state across the U.S., there are some basics that are the same countrywide. A person declares bankruptcy when he is "insolvent," meaning his liabilities exceed his assets. Simply put, bankruptcy is the inability to pay off debts.
Function
-
When a person or couple decide to file for bankruptcy, they are signaling to their creditors that they are incapable of paying off their debts. A motion is filed in the U.S. Court of Bankruptcy, along with proof of assets, income and outstanding financial obligations. Debtors must meet with their creditors in a short meeting to answer questions about their financial situation and bankruptcy. Bankruptcy provides businesses and individuals protection from creditors so they can reorganize and restructure and eventually repay their debts.
-
Types
-
There are several different types, or "chapters" of bankruptcy in the United States. For most people in a situation calling for bankruptcy, two of these chapters are viable options. The first option is filing Chapter 7 bankruptcy. This is the traditional form of bankruptcy, or "straight" or "liquid" bankruptcy. When someone files Chapter 7 bankruptcy, all of her debts will be discharged, with the exemption of alimony and child support payments, and taxes if applicable. The person will have a "clean slate." Creditors can no longer pursue legal action against the debtor after the debts have been discharged. To have her debts discharged, an individual must turn over all of her assets to a trustee, who will in turn sell, or liquidate, all of the assets to pay off the debtors.
If a person has a sincere desire to pay off his debts, rather than have them wiped clean, Chapter 13 bankruptcy is another option. When someone files for Chapter 13 bankruptcy, he must also submit a repayment plan. With a Chapter 13 filing, all creditors must drop any pending or current legal action against the debtor, including home foreclosure. Because the debtor intends to pay his creditors, his assets are exempt from liquidation. This is a very good option for those with a steady income. If the debtor is unable to follow the repayment plan within 5 years, the option of filing for Chapter 7 bankruptcy is still open to him.
Time Frame
-
This repayment plan in a Chapter 13 bankruptcy must be submitted 15 days after the bankruptcy petition is filed. The plan is then brought before the court for approval. Within 30 days, whether a plan is approved or not, the debtor must begin making regular payments to creditors. Within 45 days, the court must hold a confirmation hearing in which creditors can review and object to a repayment plan. Though the time frame for the repayment plan depends upon the court decision, repayment plans typically span 3 to 5 years.
Considerations
-
Since bankruptcy laws vary from state to state, the legal and financial fallout varies just as much. In Chapter 7, it's clear that a person loses much of her assets, including retirement and other savings. Bankruptcy can also negatively affect your ability to get credit in the future. The benefit of bankruptcy is that it wipes the financial slate clean and allows a person to rebuild his credit, even if it is a steeper upward climb than many others face.
-
