The Difference between Chapter 7 and Chapter 13 Bankruptcy

In 2016, almost 772,000 individuals in the United States found themselves with more debt than they can handle, and consider declaring personal bankruptcy. The two main bankruptcy options available to individuals are Chapter 7 or Chapter 13 each named for the chapter of the US Bankruptcy Code. Chapter 7 and Chapter 13 bankruptcy differ greatly in how they work and the relief they provide. You may choose one or the other depending on your income, assets, debts and your financial goals.

Generally, Chapter 7 allows debtors to quickly discharge most unpaid debts, whereas Chapter 13 is a reorganization bankruptcy designed for debtors who can pay back at least a portion of their debt over three to five years. If you have a regular income and the ability to make monthly payments, a Chapter 13 bankruptcy may be an appropriate remedy. If not, a Chapter 7 bankruptcy may be the better option. There can be more than a few reasons why a Chapter 7 or Chapter 13 bankruptcy is the right choice for you. It is important that you understand the differences between the two options before you choose to file for a bankruptcy. Below explains a few key differences between Chapter 7 and Chapter 13.

Chapter 7 and Chapter 13 offer different protection

Chapter 7 is a “liquidation” form of bankruptcy meaning that all or most of your unsecured debts will be discharged (or wiped out). In other words, your unsecured debts are no longer legally owed. An unsecured debt is a debt not secured by any collateral against non-repayment of the debt. Unsecured debts include credit card and medical bills. Some debts, however, are non-dischargeable and you may not be released from this debt by filing a Chapter 7. For instances, you will not get rid of your student loan debt or your obligations to pay alimony and/or child support. In a Chapter 7 bankruptcy, a bankruptcy trustee may sell (i.e., liquidates) your property to repay your creditors. A bankruptcy trustee is an entity or an individual appointed by the court to administer a bankruptcy estate.

Chapter 13 is a “reorganization” bankruptcy that involves a repayment plan (legally binding) to pay back at least a portion of your debts for a fixed period of time. Chapter 13 is designed for individuals with the ability and willingness to repay all or a percentage of their unpaid debts. The amount you pay to the creditors (all or a portion of your debts) through the repayment plan depends on your income, expenses, and types of debt. If you satisfy all the repayment obligations, you get to keep all of your property.

Chapter 7 and Chapter 13 impose different eligibility restrictions

Not everyone is eligible to file for a bankruptcy under Chapter 13. You have to prove to the court that you will be able to afford to meet your payment obligations. If you receive income irregularly or your income is too low, you may not be eligible for a Chapter 13 bankruptcy. Similarly, if the amount of your total debt is too high, you may also be ineligible. Your secured debts cannot exceed $1,184,200 and your unsecured debts cannot be more than $394,725. 11 U.S.C. § 109(e). With secured debts, creditors have the legal right to debtor’s particular property if the debtor fails to make the proper payments. Only an individual (including sole proprietor) can, and a corporate or partnership may not, file for bankruptcy under Chapter 13.

Subject to the means test, relief is available under Chapter 7 irrespective of the amount of debts or whether the debtor has regular income. Under the means test, if the debtor’s current monthly income is less than the state’s median income for a household for his or her size, the debtor can file under Chapter 7. Your current monthly income is your income minus your cost for necessities such as food, shelter or medical care. If your income is more than your state median, you have no choice but to file under Chapter 13 or the court will convert your Chapter 7 case to a Chapter 13. The debtor may be an individual, a partnership, or a corporation or other business entity. 11 U.S.C. §§ 101(41), and 109(b). However, a discharge is only available to individual debtors, not to partnerships or corporations. 11 U.S.C. § 727(a)(1).

Chapter 7 provides quicker relief from your debt than Chapter 13

An individual Chapter 7 case usually results in a discharge of debts. A discharge releases the individual from personal liability for most debts and prevents the creditors from taking any collection actions against the individual. In most cases, individual debtors receive a discharge within two to three months after the first meeting of creditors. However, because a Chapter 7 discharge is subject to many exceptions, be sure to consult with an attorney before filing a bankruptcy under Chapter 7. By filing bankruptcy under Chapter 13, an individual must make payments that come due during the Chapter 13 plan over the course of three to five years.

Under a Chapter 7 bankruptcy, you may have to sell your “non-exempt” property

Chapter 13 offers individuals an opportunity to keep their property (such as their home), although they must still make the payments (such as their home mortgage payments). If you file under Chapter 7, all or most of your debts are discharged, but your non-exempt property will be liquidated and distributed to the creditors. A few Chapter 7 cases involve individuals with non-exempt assets, and if all of your assets are exempt under federal or state bankruptcy law, there will be no distribution to the creditors. If there are non-exempt assets, a bankruptcy trustee liquidate the non-exempt assets. You need to understand that the bankruptcy trustee does not represent you (or the creditor), and sometimes, you and the trustee may disagree about the exemption status of your particular property. Therefore, if there is such disagreement, it is crucial that you consult with an attorney to discuss the scope of the exemption.

Each state has their own exemption law. In some states you will be able to choose between the federal bankruptcy exemption law (11 U.S.C. § 522) and the state’s exemption law. Under Georgia law, however, the list of the federal bankruptcy exemptions under 11 U.S.C. § 522(d) does not apply in Georgia bankruptcy cases. O.C.G.A. § 44–13–100(b)

Under a Chapter 13 bankruptcy, you will be required to make adjustment to living on a fixed budget for three to five years

Chapter 7 allows the debtor to keep income and property earned after the filing of bankruptcy. However, under a Chapter 13 bankruptcy, the debtor may not compromise its ability to make the payments after filing for bankruptcy. Although Chapter 13 offers the debtor an opportunity to retain its property, the debtor must still make regular payments under the repayment plan. Until you complete the plan, you may not incur new debts or spend your disposable income (whatever income you have left after your purchased necessities) on other things instead of making the payment. If you fail to make the payments, the court may dismiss your case or convert it to a Chapter 7 case. 11 U.S.C. § 1307(c).

This article highlights a few key differences between Chapter 7 and Chapter 13. If you find yourself struggling with debt and consider filing for bankruptcy, you would require a more detailed comparison between the two chapters. Either Chapter 7 or Chapter 13 may not be the right option for you. So, be sure to consult with a competent attorney before you file for a bankruptcy to discuss your filing options and the scope of relief each option may offer.

Cumming, Forsyth County Georgia Bankruptcy Attorneys – Call us today if you need help

If you are facing bankruptcy and need the advice and help of an experienced local area Cumming Georgia bankruptcy attorney, call us at 770-609-1247 today.  We file cases in the local Cumming, Georgia and Forsyth County Georgia area.