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Bankruptcy FAQ

Chapter 7 vs Chapter 13 bankruptcy

On Behalf of | Mar 27, 2023 | Chapter 13, Chapter 7

No one wants to be in a position where they must file for bankruptcy, and no one sets out to get in over their head financially. Unfortunately, sometimes circumstances outside their control need some help.

However, those who find themselves in a position where they need financial help, including debt relief, and decide to file for bankruptcy, should understand the differences between Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy

Both individuals and businesses can file for Chapter 7 bankruptcy, which is a type of liquidation. However, their gross and disposable income must fall below a means test amount. This process can get rid of qualifying debts. However, this process usually cannot remove existing property liens and the trustee can sell any nonexempt property to pay debts.

Fortunately, these individuals usually receive their Chapter 7 discharges within four-six months. Unfortunately, Chapter 7 bankruptcy does not offer solutions to help them catch up on car and house payments and avoid foreclosure or repossession.

Chapter 13 bankruptcy

Only individuals and sole proprietors can file for Chapter 13 bankruptcy, which reorganizes your debt instead of liquidating it. In addition, there are limits on the amount of debt they can have. This process creates a way for individuals to catch up on their payments for cars or houses.

After meeting basic requirements, Chapter 13 may remove property liens and reduce loan balances. Unfortunately, individuals may need to pay some of their unsecured debt, their payments may last five years and their discharge will not occur until the end of the payment period.

Generally, primary homes, public benefits, retirement plans, insurance, modest household possessions, a vehicle and tools necessary for work are all protected under Chapter 7.  Those who need to protect assets or do not meet the stringent requirements of Chapter 7 can often file for Chapter 13 bankruptcy.