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The Difference Between Ch. 7 and Ch. 13

Filing for bankruptcy is a major decision that can impact your life for years to come. While declaring bankruptcy allows you to get a much-needed fresh start, it can be a complicated legal process that requires hours or days of research before making the decision to file. Once you decide to file, you will be facing another tough choice: filing for bankruptcy under Chapter 7 or Chapter 13.  

Chapter 7 and Chapter 13 refer to sections of the United States Bankruptcy Code that address what happens to your debt in each of these processes. It is critical that you understand the difference between Chapter 7 and Chapter 13 to ensure that you choose the correct chapter for your personal situation. If you find yourself at a crossroads when trying to choose between Chapter 7 and Chapter 13 bankruptcies, The Law Office of Marc G. Alster can help. Mr. Alster serves debtors in Hackensack and throughout all of Northern and Central New Jersey, as well as counties in New York.  

Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

While both Chapter 7 and Chapter 13 help resolve your debt, they go about it differently. Below are some of the primary differences between these two chapters: 

  • How they work. First and foremost, Chapter 7 bankruptcy and Chapter 13 bankruptcy differ in how they work. Chapter 7 involves liquidation and is often called “straight bankruptcy,” while Chapter 13 involves reorganization and is often referred to as a “wage-earner’s bankruptcy.” When you file for Chapter 7, if successful your unsecured debts will be discharged (eliminated) by way of a Discharge Order issued by the Bankruptcy Court at the conclusion of your Chapter 7 case, and you will able to retain full ownership and possession of all of your assets as long as they can be fully protected through the application of the Bankruptcy Code's numerous exemptions.

    Chapter 13 bankruptcy, on the other hand, entails developing a repayment plan to make payments to a Chapter 13 Trustee from the filer’s income, through which some or all of your creditors are paid over a period of three to five years.  

  • Who can file? While Chapter 7 bankruptcy is an option available to both individuals and business entities, Chapter 13 is available to individuals only. The only exception exists for sole proprietors, who can file both Chapter 7 and Chapter 13.  

  • Eligibility requirements. To file for bankruptcy under Chapter 7, a debtor’s income must be below the median level in their state or debtors need to pass the Bankruptcy Code's Means Test. Chapter 13 bankruptcy is available to individuals whose secured debt does not exceed $419,275, and the total unsecured debt must be lower than $1,257,850.  

  • The time it takes to get a discharge. With Chapter 7 bankruptcy, the filer can typically receive a discharge within three to five months. If you file for Chapter 13 bankruptcy, the discharge occurs upon completion of all payments under the repayment plan, which usually takes three to five years, depending on a variety of factors.  

  • The risk of losing property. In Chapter 13 bankruptcy, there is no risk of losing property as long as filers submit all of the required payments in accordance with their Chapter 13 plan, which must be approved by the Bankruptcy Court. The same cannot be said about Chapter 7 bankruptcy; if Chapter 7 debtors cannot fully protect all of their assets through the application of numerous exemptions allowed by the Bankruptcy Code, a bankruptcy Trustee can sell all non-exempt assets (assets that cannot be fully protected) to repay creditors.  

As you can guess, there are quite a few things to consider when trying to decide which one is better for your particular situation. You might want to schedule a consultation with a skilled bankruptcy attorney who will evaluate your unique financial standing and help you make an informed and rational decision.  

The Benefits of Filing for Bankruptcy Under Chapter 7 vs. Chapter 13

Given the Chapter 7 vs. Chapter 13 bankruptcy differences discussed above, each of these types of bankruptcy has one primary benefit: 

  • When you file for bankruptcy under Chapter 7, your debts can be cleared in a matter of a few months, which could feel more like a fresh start. In Chapter 13, you would have to complete your repayment plan to get a discharge of debt, which can take three to five years.  

  • When you file for bankruptcy under Chapter 13, there is no liquidation of your assets, which means you can keep all of your property as long as you keep up with your payments. In Chapter 7, your non-exempt assets can be liquidated to repay the amount owed to creditors. 

  • Chapter 13 is most often used as a vehicle for allowing homeowners and other real property owners to catch up on past-due mortgage arrears so that property owners can avoid foreclosure and protect/keep the nonexempt equity they have in their real property. A Chapter 7 proceeding does not give debtors the ability to do this.

Chapter 7 and Chapter 13 bankruptcies are similar in triggering an automatic stay that prevents the filer’s creditors from contacting them about the debt and taking any debt collection actions, such as collecting payments and garnishing wages.  

What Is the Best Type of Bankruptcy?

There is no such thing as “the best type of bankruptcy,” as every debtor’s circumstances are unique, not to mention that you may not be eligible to file under Chapter 7, which requires debtors to either pass a means test or have a below-median level income in their respective state. Chapter 13 bankruptcy may be a better alternative for those who do not qualify for bankruptcy under Chapter 7 or who do not want to lose any of their assets. To determine which chapter is best for you, you should consult with an experienced bankruptcy attorney who can help you explain your options based on your unique situation.  

Understand Your Options Today 

While Chapter 7 and Chapter 13 both offer debt relief, they work very differently. Whether you should file under Chapter 7 or Chapter 13 will depend on your unique financial situation. You should reach out to an experienced personal bankruptcy attorney to help you make this important decision, which if wrong can cost debtors their home ownership and/or equity they have in other real property or other significant assets. The Law Office of Marc G. Alster. Mr. Alster can help at every step of the process and ensure that you choose the chapter that’s right for you. Schedule your consultation with him today.