Chapter 7 vs. Chapter 13 Personal Bankruptcy

In simple terms – the difference between a Chapter 7 and a Chapter 13 personal bankruptcy:

Chapter 7 Bankruptcy is generally thought of as a “Liquidation” of Asset, and a Chapter 13 Bankruptcy is thought of as more of a “Reorganization” or Adjustment of Debts so they are more manageable for a person with a regular income;

What kinds of people and situations are better suited for Chapter 7 as opposed to Chapter 13 bankruptcies?

Chapter 7 Bankruptcy was designed to help people eliminate a lot of “unsecured” debt such as credit cards, payday loans, medical bills and utilities, and is more suited for people with these kinds of debts who do not own a lot of property and have a low monthly income.  A person must also qualify to file a Chapter 7 bankruptcy which is determine by answering questions on what is known as a “Means Test” which evaluates your financial situation.  If you do not qualify under the test, you must you’re your bankruptcy under Chapter 13 rather than Chapter 7.

What kinds of people and situations are better suited for Chapter 13 as opposed to Chapter 7 bankruptcies?

Well, first of all, if you don’t qualify for Chapter 7 under the means test, you have to file under Chapter 13.  As for the difference between the two types, rather than simply eliminate unsecured debts in a situation where the person has very little by way of assets and income in a Chapter 7 situation, Chapter 13 is designed to keep people in the home that they own and to keep their possessions by using their regular income to pay off their debts in a more manageable way.  To this end, you and your attorney work with the Court to consolidate, prioritize, repay, and, in some cases, reduce or eliminate old debts.  Chapter 13 bankruptcy allows you to make one lower, interest-free affordable monthly payment to a bankruptcy trustee who prioritizes your debts and deals directly with your creditors.   The people best suited for a chapter 13 bankruptcy are those who may be facing foreclosure or repossession and want to keep their home or car, who may need more time to pay overdue bills, who may have had a temporary financial setback such as illness or job loss, and who currently have a regular income so they can make the required Chapter 13 monthly payments.

How long does each type of bankruptcy typically take from the time you file until it is discharged?

All cases are different; however, a Chapter 7 bankruptcy generally takes approximately 180 days (6 months) from filing until it can be discharged.  The duration of the Chapter 13 payment plan is typically 3-5 years, then, after the payment plan is fulfilled, the Chapter 13 bankruptcy can be discharged.  Remember, however, that under either Chapter, the debtor must complete a Court-approved debtor education course before a discharge of the bankruptcy will be issued.

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