Have you ever wondered about what is the difference between a chapter 7 and a chapter 13 bankruptcy?  This post will help clear up the confusion!

DO NOT take the information to follow as legal advice!  Before making any decisions, you should consult an experienced, licensed bankruptcy attorney. 

Chapter 7 bankruptcy is a liquidation form of bankruptcy. 

This means all of your non-exempt assets get sold and the proceeds are shared amongst your unsecured creditors. 

However, many of your assets will be classified as "EXEMPT", and will not have to be sold if they fall under the following guidelines: (again, these change all the time, so make sure you consult a licensed bankruptcy attorney!)

Few examples of exempt assets:

How do you value your property?

The rule of thumb is to use garage sale prices, although current events can cause certain items’ value to sky rocket and the Trustee will sell it for what he or she can receive and not what you think it is worth.

It is important to know which debts get discharged in a Chapter 7 bankruptcy and which will remain after filing. 

After the bankruptcy completes (which is usually 4 months if there are no non-exempt assets or a minimum of 10 months if there are non-exempt assets) you receive a discharge.  This means you are no longer responsible for paying those dischargerable debts.

In most cases, a Chapter 7 bankruptcy is more attractive than Chapter 13 because it is much shorter time commitment and you don’t have to give up all future disposable income for 3-5 years. 

But what if you do not qualify for a Chapter 7?

Then you would most likely file for a Chapter 13 bankruptcy.

A Chapter 13 bankruptcy involves paying your creditors back over a period of 3-5 years.  You take your monthly expenses away from your monthly income, what is left over is called disposable income. 

The entirety of that disposable income, a minimum of $100 will get paid to your unsecured creditors. 

At the conclusion of your 3-5 year period, what they have received is all that they get and the rest of the unsecured debt is discharged.  If you pay your creditors back in full prior to the 3 to 5 years finishing, than your case closes since there is no longer any debt to administer.

You only want to file a Chapter 13 bankruptcy if either you can’t use Chapter 7 or a Chapter 13 would give you an advantage.  A Chapter 13 must be used if you make too much money under the means test to qualify for a Chapter 7 bankruptcy or you have filed a Chapter 7 bankruptcy within the last 8 years. 

You gain an advantage from filing a Chapter 13 bankruptcy if you need to catch up on back mortgage payments or you have certain tax or domestic support debts.  There are other reasons to file a chapter 13 and I would strongly recommend consulting a licensed bankruptcy attorney if you are contemplating filing.

One last important difference between these two chapters of bankruptcy is what happens if you want to quit the process. 

A Chapter 13 bankruptcy is a form of voluntary repayment, which you can stop at any point.  There will be no penalty, just all the debts will once again come due and you will have lost the protection of the automatic stay. 

A Chapter 7 bankruptcy is a liquidation form of bankruptcy and once initiated continues until the Trustee is finished.  This is true even if you voluntarily give up your right to a discharge, fail to make a payment, or fail to take the required classes.  You have the right to give up your discharge, but that does not prohibit the Trustee from continuing to administer your estate and sell your non-exempt belongings. 

Bankruptcy should only be filed if you are aware of the risks and benefits.   Most bankruptcy attorneys offer free one hour initial consultations, I’d urge you to call one in your area before deciding which chapter to file.

Are there alternatives to bankruptcy?

Yes.  You may qualify for:

Debt Management or Debt Settlement

Call today for a FREE CONSULTATION.

Written by Noah Bishop of Gresham Family & Bankruptcy Law