July 14, 2020

What is the Difference Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy?

You’re deeply in debt and there’s not enough income to keep up with your obligations. After trying everything you can think of to regain control of your finances, it’s clear that seeing a bankruptcy lawyer is the only sound solution. The means test confirms that you’re eligible for bankruptcy protection and the lawyer begins to discuss the potential of filing a Chapter 7 or a Chapter 13 petition. How do these differ and which one would be best in your case? Here are some essentials that you should know.

Understanding How a Chapter 7 Bankruptcy Works

A Chapter 7 bankruptcy is designed to provide relief from your current debt obligations. With the help of the lawyer, you will compile a list of all debts. Supporting documents like invoices and monthly statements should be provided. The goal is to identify how much you owe to each creditor on the list.

You’ll also need to provide information about your financial condition. That includes all assets currently in your possession. If you have assets that are currently being paid for with the aid of installment payments, they will need to be included as well.

One your case id filed, the court will review the petition and determine if you meet all the requirements for bankruptcy. If so, your assets will be classified as exempt or non-exempt. Exempt assets remain yours to use as you see fit. Non-exempt assets are surrendered to the court and sold to partially settle your debts. The remaining balances are discharged and you no longer have to deal with them.

While the court is considering your bankruptcy petition, a stay is placed on all attempts to collect your debts. If any creditor contacts you and attempts to collect the debt, report that creditor to your attorney at once. The court will handle the situation from there.

In the case of back mortgage or car payments, you have the opportunity to catch up on those while the bankruptcy is in progress. Assuming that you do so and the creditor is satisfied, you retain those assets and continue to make payments on time until those debts are paid in full.

Priority Debts and a Chapter 7 Bankruptcy

While most types of debt can be discharged in a Chapter 7 bankruptcy, there are exceptions. Judgments related to back taxes, child support payments and owed alimony are some examples. If any of these are among your debts, the bankruptcy lawyer might discuss filing a Chapter 13 bankruptcy petition.

How a Chapter 13 Bankruptcy Works

Unlike a Chapter 7, a Chapter 13 bankruptcy is not designed to discharge your debt in a matter of months. Instead, it places you under the protection of the court while all or most of your debt is paid off over time. While under the court’s protection, no creditor can contact you or make an attempt to collect an outstanding debt.

A Chapter 13 bankruptcy will last between three and five years. During that time, funds are withheld from your paycheck and sent in to the court each month. If you are self-employed, the responsibility of making those monthly payments is yours. The court distributes the money to your creditors in accordance with an approved payment plan. At the end of the bankruptcy term, any debt that remains is discharged.

Your lawyer will likely recommend this solution if you have debts that cannot be discharged as part of a Chapter 7 action. Those debts will receive priority and be paid before any of the non-priority debts. Once those obligations are satisfied, payments on unsecured/non-priority debts continue until the end of your bankruptcy term.

While your lawyer can make recommendations, the final choice is up to you. Consider each one carefully and listen to why your lawyer may suggest one solution over the other. The decision that you make will play a major role in how your finances might look over the next several years.