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What is the difference between chapter 7 and chapter 13 bankruptcy?

Are you considering filing bankruptcy? Before choosing the type of bankruptcy you are going to file you must be fully aware of the differences between a chapter 7 bankruptcy and a chapter 13 bankruptcy. Additionally, not all debtors qualify for a chapter 7 bankruptcy. The first main difference is the type of relief each bankruptcy provides. A chapter 7 bankruptcy is a liquidation of debt, providing a “fresh start” to the debtor, while a chapter 13 bankruptcy is a reorganization of debt.

Which bankruptcy do you qualify for? 

When considering a chapter 7 bankruptcy, as an individual or a business entity, you must pass the means test unless the majority of your debt comes from business debt you may not be required to file a means test. The means test takes into consideration your income, expenses, and family size. These details are then compared to the state median household incomes. If your household income is below the median income, you will likely pass the means test and qualify for chapter 7. However, even if you pass the means test a debtor cannot have had a previous chapter 7 discharge in the past eight years or a chapter 13 discharge in the past 6 years. The last hurdle for a debtor to be considered eligible for a chapter 7 bankruptcy is that a debtor may not have filed a petition for a chapter 7 or 13 bankruptcy in the past 180 days that was dismissed. If you do not qualify for a chapter 7 bankruptcy you may qualify for a chapter 13. A chapter 13 bankruptcy can only be qualified as individuals, including sole proprietors. The first qualification for a chapter 13 is that a debtor must have a steady income and be current on all tax filings. The quantity of the debtors unsecured and secured debt is taken into consideration as well. A debtor’s unsecured debt cannot exceed $419,275, and secured debt cannot exceed $1,257,850. Similar to a chapter 7 bankruptcy a debtor cannot have filed a chapter 13 bankruptcy in the past two years or a chapter 7 bankruptcy in the past four years. 

A debtor needs to be aware of how long it will take for the discharge to take place for each type of bankruptcy and how long the discharge will stay on the debtors’ credit report. When filing a chapter 7 bankruptcy the discharge generally takes place in under six months, while a chapter 13 bankruptcy is generally between three to five years, depending on the repayment plan the debtor has. A chapter 7 bankruptcy may have a faster discharge, however, a discharge will stay on your credit report for ten years from the filing date. A chapter 13 bankruptcy discharge stays on your credit report for seven years from the filing date. 

Each form of bankruptcy offers its own benefits to the debtor. Both chapter 7 and chapter 13 bankruptcies offer an automatic stay. An automatic stay halts all collection efforts and legal proceedings from collectors. A chapter 7 bankruptcy is a swift resolution to overwhelming debt for debtors, while a chapter 13 bankruptcy, even though it is a longer time frame, allows a debtor to retain certain assets and catch up on arrearages to certain debts protecting the debtor from foreclosure or repossession in most cases. While both have many benefits each has drawbacks that the debtor must take into consideration. A chapter 7 allows the trustee to sell nonexempt property, if you have assets that are not protected or exempted your case can be converted into what is called an ‘asset case’.  Recently, smaller asset cases are becoming more prevalent in some states due to the somewhat strange or strict exemption laws.  Additionally, a debtor is not given the chance to catch up on missed payments to avoid a foreclosure or repossession. The major drawback for debtors in chapter 13 is the length of the repayment plan. The debtor is required to make monthly plan payments for three to five years, depending upon the debtor’s income which can become overwhelming for many debtors. For best practice it is ideal that the debtor discuss their options with their attorney prior to filing to determine the best fit for their needs.

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Stephanie
Randall

Chief Managing Partner

Colorado Springs

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