Thursday, January 2, 2014

What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Generally speaking, a Chapter 7 Bankruptcy involves a total liquidation of the debtor’s assets (although the debtor may keep certain allowable exempt assets), and any non-exempt assets are used to satisfy the debtor’s unpaid debts.  Any remaining dischargeable debts are discharged, meaning they are no longer owed.  A Chapter 7 case places no limits on the amount of debt that may be discharged; however, there are income qualifications in order to be eligible for Chapter 7 as a result of the 2005 changes to the Bankruptcy law.

A Chapter 13 case places no income restrictions on the debtor, so if you cannot file Chapter 7 because you do not pass the means test, you can likely file Chapter 13.  Chapter 13 begins much like a Chapter 7 case, but after the liquidation of non-exempt assets, if any, the debtor will pay a certain amount based on his available income and after deduction of living expenses to the U.S. Trustee, who will distribute payment to creditors on a pro-rata basis.  The debtor will make monthly payments for 3-5 years, depending on certain factors, and then, as long as the debtor makes payments every month, the remaining unpaid portion of most debts will be discharged (though some debts, such as student loans may still be owed even after completion of the plan).

Chapter 13 has the benefit of permitting the debtor to spread out the repayment of certain debts over a 3-5 year period that would be otherwise non-dischargeable, such as tax debt, or student loans.  Additionally, the debtor could use Chapter 13 to avoid foreclosure and pay back mortgage arrearages over the term of the plan, which is helpful in cases where the lender is demanding a high “cure” amount to voluntarily get a house out of foreclosure.

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