Question

Discuss the purpose, the similarities and differences of Chapter 7 and Chapter 13 types of bankruptcies.

Answer 1

Chapter 7 Bankruptcy

Chapter 7 is a liquidation bankruptcy that wipes out most of your general unsecured debts such as credit cards and medical bills without the need to pay back balances through a repayment plan. To qualify for Chapter 7 bankruptcy, you must meet income requirements. If you make too much money, you’ll have to file under Chapter 13 bankruptcy.

When you file for Chapter 7, an order called the “automatic stay” immediately stops most creditors from pursuing collection efforts. Also, a bankruptcy trustee is appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the Chapter 7 trustee’s job is to sell your nonexempt property (property that you can’t protect with a bankruptcy exemption) to pay back your creditors. If you don’t have any nonexempt assets, your creditors receive nothing.

While Chapter 7 bankruptcy works well for low-income debtors with little or no assets, it can also work for filers whose discharged debt exceeds the value of the property sold—especially if the trustee will apply the funds to non dis-chargeable debt, such as income tax or support arrearages.

Chapter 13 Bankruptcy

Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who have enough left over each month to pay back at least a portion of their debts through a repayment plan. Even though most Chapter 13 filers make too much money to qualify for Chapter 7 bankruptcy, many debtors choose to file for Chapter 13 bankruptcy because it offers many benefits not available in Chapter 7 (such as the ability to catch up on missed mortgage payments or strip wholly unsecured junior liens from your house).

In Chapter 13 bankruptcy, you get to keep all of your property (including nonexempt assets—however you’ll have to pay creditors an amount equal to the value of your nonexempt property). In exchange, you pay back all or a portion of your debts through a repayment plan(the amount you must pay back will depend on your income, expenses, and type of debt).

Typically, Chapter 13 bankruptcy is for debtors who:

• don’t qualify for Chapter 7 but need debt relief (for instance, to lower credit card payments, stop litigation, or prevent a wage garnishment)
• have nondischargeable debts such as alimony or child support arrears that they’d like to pay off over three to five years, or
• have fallen behind on a house or car payment and want to get caught up on missed payments and keep the property.

Differences Between Chapter 7 and Chapter 13 Bankruptcy

	Chapter 7	Chapter 13
Type of Bankruptcy	Liquidation	Reorganization
Who Can File?	Individuals and Business Entities	Individuals Only (Including Sole Proprietors)
Eligibility Restrictions	Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Test	Cannot Have More Than $394,725 of Unsecured Debt or $1,184,200 of Secured Debt
How Long Does It Take to Receive a Discharge?	Typically Three to Four Months	Upon Completion of All Plan Payments (Usually Three to Five Years)
What Happens to Property in Bankruptcy?	Trustee Can Sell AllNonexempt Property to Pay Creditors	Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets
Allows Removing Unsecured Junior Liens from Real Property Through Lien Stripping?	No	Yes (If Requirements Are Satisfied) (Learn about lien stripping.)
Allows Reducing the Principal Loan Balance on Secured Debts?	Yes but on Tangible Personal Property Only	Yes (If Requirements Are Satisfied)
Benefits	Allows Debtors to QuicklyDischarge Qualifying Debts and Get a Fresh Start	Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments
Drawbacks	Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession.	Must Make Monthly Payments to the Trustee for Three to Five Years. May Have to Pay Back a Portion of General Unsecured Debts.