The Major Differences Between Chapter 13 and Chapter 7 Bankruptcy

Unfortunately, bankruptcies are all too common. The US Courts states that there were 911,086 bankruptcies filed in the US in 2015. Some individuals get so bogged down in debt that they have no other option but to file for bankruptcy.

However, many people don’t know a lot about the bankruptcy process. For one, they may not be sure about the differences between Chapter 7 and Chapter 13 bankruptcy. The differences are in fact extremely significant. You should be well aware of them before even contemplating filing for bankruptcy.

Chapter 7 Bankruptcy

Traditionally, when people thought of bankruptcy, they thought of Chapter 7 bankruptcy. At the center of this form of bankruptcy is something known as liquidation. This occurs when a person’s assets are sold off by the bankruptcy court. The funds obtained from those sales are then used to pay off the debtor’s creditors. This is significantly different from Chapter 13 bankruptcy which involves a person working to repay off debts under a new repayment plan created by the court.

The entire process takes from four to six months to complete. The greatest benefit of a Chapter 7 bankruptcy is that the debtor is absolved of the debt completely when the process concludes. Some creditors, especially those without secured loans, may go unpaid. For that reason, most creditors tend to prefer Chapter 13 bankruptcy.

What assets are able to be liquidated by the court generally depends on the laws of the state in question. Assets are either exempt or non-exempt under the law. In most jurisdictions, there is a homestead exemption which covers the primary residence of the debtor only. There may also be an exemption for the debtor’s primary automobile and personal property. However, all of these will be capped. If the debtor lives in a mansion and drives a Lamborghini, they will likely be liquidated with the debtor only retaining some of their value from the sale.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy was actually introduced more recently. The reason it was created was because of the government’s belief that the bankruptcy system that existed previously was being abused by people who could feasibly repay their debts but didn’t want to.

With that in mind, Chapter 13 bankruptcy can be thought as for a reorganization of a person’s debts instead of a complete elimination of them. The bankruptcy court will work with a debtor’s creditors or form a new payment plan for the debt in question that the debtor will be more likely to pay off over the long term. With this in mind, Chapter 13 is sometimes more preferred by creditors than debtors who will still have to work to pay off their debts for an extended period. According to the IRS, tax refunds may also be used to pay off Chapter 13 bankruptcy debt.