Bankruptcy: Filing Chapter 7 vs. Filing Chapter 13
A consumer contemplating bankruptcy should explore every option. Individual bankruptcy filings generally fall under Chapter 7 or Chapter 13 of federal bankruptcy laws. Chapter 7's design focuses on discharging all debt through liquidation of assets. Chapter 13 works with the debtor through a trustee to create and maintain a workable payback plan.
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Chapter 7
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Debtors who pursue Chapter 7 bankruptcy must pass a "means test" to determine if he qualifies under parameters established with significant amendments made to the bankruptcy law in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act. If a debtor qualifies for Chapter 7 bankruptcy relief, he turns the management of his assets over to a trustee, who determines the viability of selling the assets to cover debts.
Chapter 13
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If a debtor has a job with a reliable source of income, she may qualify for and file Chapter 13 bankruptcy. Chapter 13 allows for the payment of debts through a prearranged plan over a period of three to five years. The federal bankruptcy court approves the plan before the action is set into motion. Upon receipt of payment from the debtor, the trustee forwards the agreed-upon amount to the debtor's creditors.
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Reaffirmation of Debt
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Upon filing Chapter 7, a debtor may consider reaffirming the debt on certain possessions. Most debtors who reaffirm do so on a house or vehicle. The debtor and the creditor, as well as the trustee, must agree to the reaffirmation. Even though Chapter 13 allows for a discharge of debt following successful completion of the agreed-upon plan, the court generally does not discharge mortgage debt, making the debtor ultimately responsible for the loan on his home.
Debt Discharge
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All debts not reaffirmed in a Chapter 7 bankruptcy action are subject to discharge within 60 to 90 days of the meeting of the creditors, which happens early on in the bankruptcy proceedings. The debtor must complete a court-approved, financial-management course as a condition of discharge. Chapter 13 discharge occurs when the debtor completes the repayment plan previously authorized by the court. The Chapter 13 debtor must also complete the financial management course, certify that all past-due support obligations incurred prior to the filing have been satisfied in full and certifies to the court that she has not been granted a discharge in a prior bankruptcy in a court-specified period of time. If all conditions are met, the discharge in a Chapter 13 bankruptcy action is automatic unless a creditor files a motion with the court objecting to the discharge.
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