Chapter 7 vs Chapter 13
What is Bankruptcy?
Bankruptcy is a federal court procedure that helps both consumers and businesses relieve their debts and repay their creditors. If an individual is seeking to file for bankruptcy, they must first prove their entitlement to it. The two forms of personal bankruptcy are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.
What is Chapter 7 Bankruptcy?
Under Chapter 7 Bankruptcy, an individual can have all or part of their debt relieved using liquid assets. Liquid assets are assets that can be quickly converted into cash. These can include checking and savings accounts. Some liquid assets will be turned over to court and distributed among the creditors as partial relief of debt. Certain assets are known as “exempt assets.” Each state possesses laws that define which liquid assets are non-exempt, and which are exempt. In Chapter 7 Bankruptcy, once all non-exempt liquid assets have been distributed to creditors, all remaining debts are discharged and the individual is no longer liable. After a Chapter 7 Bankruptcy, no creditors or collectors may attempt to pursue further repayment.
For an individual to qualify for Chapter 7 Bankruptcy, they must first pass a means test proving that their income is less than the median income for their family size. In addition to passing the means test, one must receive credit counseling from an approved credit counseling agency.
What is Chapter 13 Bankruptcy?
Under Chapter 13 Bankruptcy, an individual must repay all or part of their debt through a three-to-five-year plan. When the individual filing for Chapter 13 Bankruptcy goes to court, they must supply a repayment plan. The payments are to be made to the court who, in turn, distribute the payments to the creditors. In time, there is a hearing held to approve the payment plant. Creditors may object to the payment amounts, but the judge has the ultimate authority with regards to the payment plan. Once an individual has completed the Chapter 13 payment plan, all remaining debt is discharged. After a Chapter 13 Bankruptcy, an individual is no longer liable for the discharged debt.
An individual may choose to file for Chapter 13 Bankruptcy if they have secured debts, like a car loan, that they would like to continue paying. Also, if an individual desires to keep their liquid assets, they should file for Chapter 13 Bankruptcy. Finally, to file for Chapter 13 Bankruptcy, an individual cannot have secured debt of more than $922,975, and they cannot have unsecured debt of more than $307,657.