Key Distinctions: Chapter 7 Bankruptcy v. Chapter 13 Bankruptcy
Chapter 13 Bankruptcy and Chapter 7 Bankruptcy are the two most common forms of consumer bankruptcy. There are, however, key distinctions between them.
Some of the most important distinctions are:
- Liquidation. In a Chapter 7 Bankruptcy, the Trustee may focus on your assets and whether those should be liquidated and the proceeds distributed to your creditors. In a Chapter 13 Bankruptcy, the Trustee is not generally interested in liquidating your assets. Rather, the Chapter 13 Trustee is interested in maximizing the amount of money paid to your creditors through the Chapter 13 Plan.
- What is discharged? There are certain types of debts that cannot be discharged in either form of bankruptcy. However, generally speaking, all of your debts are discharged in a Chapter 7 Bankruptcy and your risk is that some of your assets are liquidated. In a Chapter 13 Bankruptcy, the discharged debt is that debt that you did not pay back by virtue of your Chapter 13 Plan payment. For example, if you owed $10,000.00 at the filing and paid back $3,000.00 through your plan payments, then $7,000.00 is discharged.
- Different qualification guidelines. You may not qualify for a Chapter 7 Bankruptcy and thus only have a Chapter 13 Bankruptcy available to you. The main reason an individual may fail to qualify for a Chapter 7 Bankruptcy is the Means Test. If you fail to pass the Means Test, it likely means your income exceeds guidelines established by the United States Trustees Office. Additionally, you may possess assets that would be at risk of liquidation under a Chapter 7 Bankruptcy but not under a Chapter 13 Bankruptcy. Finally, you may be behind on your home mortgage payment. In a Chapter 7 Bankruptcy, you will likely be unable to reaffirm that mortgage but a Chapter 13 Bankruptcy may allow you to include the arrearage in your Chapter 13 Bankruptcy Plan payment and pay down the balance.
- Duration of the case. A Chapter 7 Bankruptcy will take approximately four months from filing to discharge. A Chapter 13 Bankruptcy will last between 36 and 60 months.
- Activity while the case is pending. In a Chapter 13 Bankruptcy, you cannot incur additional debt, such as for a new car, without prior court approval. Additionally, you may be required to surrender a portion of your income tax refund each year while the case is pending. A typical Chapter 7 case is short enough that these types of concerns do not present an issue.
There are additional distinctions, but the above presents those most commonly of concern to an individual considering a bankruptcy filing.