Chapter 7 vs. Chapter 13

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

For anyone that is contemplating filing for bankruptcy because of financial hardship, Chapter 7 and Chapter 13 are two very significant terms. Bankruptcy is a legal procedure in which a person or a business can get rid of debts and be able to start fresh. They can also use this process to be able to repay the debts under special programs. There are two types of bankruptcy – Liquidation and Reorganization. Chapter 7 bankruptcy involves the liquidation of assets and Chapter 13 bankruptcy involves reorganization of a business.

Chapter 7 Bankruptcy

This term refers to a straightforward bankruptcy and is the one most often chosen by individuals. It involves selling off all assets and using the money to repay as many debts as possible. The court makes the decision as to how much money each creditor receives and some of the assets are exempt from liquidation. These exemptions usually include the family car and the family home. In addition, the individual is permitted to have an income each month to take care of essential expenses. Since the rules regarding Chapter 7 bankruptcy were changed in 2005, a person cannot file for this process if by selling off some of the assets he will be able to repay 25% of the debt.

It costs $209 for file for Chapter 7 and the process usually takes between three and four months to complete. During this time no fees have to be paid to the court.

There are essential pieces of information that an individual has to submit when filing for Chapter 7. These are:

  • A list of creditors and the amount owed to each one
  • The debtor’s monthly income and where it comes from
  • List of all the assets of the individual
  • List of monthly expenses

Chapter 13 Bankruptcy

Under Chapter 13, a business gets the time it needs to reorganize. It can still continue its operations and bills are still paid. The process is handled by the court and the debtor has to provide the court with details as to how the debts will be repaid. In the process, you will repay some of the debts in full and others only in part. Some of the debts may be wiped out. The individual also receives a longer period of time in which to reorganize the finances.

In order for an individual to file bankruptcy under Chapter 13, the unsecured debt must not be more than $360,475 and the amount of secured debt cannot exceed $1,081,400. The debtor does have to supply the court with the same information as is required with Chapter 7. The filing fee is $194 and you don’t have to liquidate your assets. The court will make the decision as to how much each creditor is to be paid.

Both Chapter 7 and Chapter 13 are designed to relieve the stress of a person who is unable to meet his/her financial expenses. It makes things easier, but there are differences between the two filings in the way in which they are carried out.

In a Chapter 7, you do have to sell your assets to repay as much of your bills as possible. You do not have to sell anything off under a Chapter 13. The time period for a Chapter 13 is much longer than the three or four months associated with a Chapter 7. It has become more difficult though to file for bankruptcy under Chapter 7 and it is better to opt for reorganization under Chapter 13.