Difference Between Chapter 7 & Chapter 13
Chapter 7 and Chapter 13 are two types of bankruptcy that debtors can file, but the similarities end there. One takes a few months to receive a discharge of debts while the other can take a few years. A consumer can file both voluntarily, but with one chapter, a debtor can be forced into the bankruptcy filing process.
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Chapter 7
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Chapter 7 is the most common form of bankruptcy filing. It is available to individuals, married couples, partnerships and corporations. When a debtor, whether an individual or a business, files a Chapter 7 petition, the debtor essentially asks the bankruptcy court to sell its property to pay a portion of its debts. When the debtor's creditors have been paid in a manner satisfactory to the trustee and the court, the debtor may be granted a discharge.
Businesses
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When a partnership or corporation files for Chapter 7 bankruptcy, it does so with the intent of going out of business. Chapter 7 gives a partnership or corporation a break from creditors who will be racing to the courthouse to collect debts. This way, the partnership or corporation can pay off its debts in an orderly manner. No discharge would be needed, because once all of the business's property has been sold, only a shell of a business is left to be dissolved.
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Involuntary Petition
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If creditors do not like what a debtor is doing--for instance, picking and choosing which creditors to pay--the creditors can file an involuntary Chapter 7 petition. The creditors must show that the debtor does not pay bills as they come due or that a custodian has been running the debtor's business for the last 120 days. The debtor has 20 days to contest an involuntary petition. If the debtor does not contest the petition in 20 days, the court will grant an order for relief, allowing the bankruptcy filing to proceed. If contested, the parties go to trial.
Chapter 13
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Only individuals can file for Chapter 13 bankruptcy. Chapter 13 is known as the wage-earner's plan. Unlike Chapter 7 debtors, Chapter 13 debtors have the means to pay off their creditors when given a break. That break would come in the form of an automatic stay, which stops collection efforts, and the opportunity to reschedule secured debts. By rescheduling the secured debts, the debtor's payments will likely be lowered, as the debtor will be given three to five years to pay off the debts.
Repayment
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In Chapter 13, the debtor proposes a repayment plan to the court. The plan suggests the way the debtor will repay his debts over a three- to five-year period. Once the court approves a plan, the debtor can keep his property, so long as he makes payments to the plan. No one can be forced into Chapter 13 bankruptcy. Forcing a debtor to pay for items for years when he could easily go along with foreclosure proceedings or let his car be repossessed, for example, would be a form of indentured servitude.
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