Difference Between Chapter 7 and Chapter 13 Bankruptcy

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In the modern scenario, we can find many people trapped in a huge pile of debt. The reason lies in the easy accessibility of credit compared to the past. Nowadays, we often experience the continuous bombardment of tempting advertisements narrating how easy it is to get a loan. We often get lured by them, and no wonder, most of us land in a situation where our monthly expenditure is more than our income. This results into an individual turning insolvent.

Debt can have very adverse consequences. It can affect you both financially and psychologically. That’s why it is of immense importance to take quick action to solve this problem. There are ways like negotiation, consolidation, or seeking the help of a debt management company. But if it is too late to solve this financial mess, then don’t get disheartened. There is still a way out. In such situations, filing for bankruptcy is often the most sensible option.

Filing for Bankruptcy

The Congress has enacted the Bankruptcy Code to help people trapped in such debts and who need help to get a fresh start in life. For many people, it is often an embarrassing situation to file for bankruptcy. They feel very uncomfortable when it comes to exercising this right. However, this can be their once in a lifetime chance for getting a new financial lease. Although, a recent amendment in the law has made it much more difficult to exercise the filing, it is still not impossible. Certainly, the procedure has been lengthened compared to the past; however, there are expert law firms and counseling centers to help you exercise your constitutional right.

Whether a Chapter 7 or Chapter 13 bankruptcy is the right choice depends on your income, assets, debts, and financial goals. The following sections will help you decide which one to go for.

Chapter 7

This is the most common type of bankruptcy, and is also known as straight bankruptcy. The proceedings involve liquidation of the borrower’s entire nonexempt property. The amount that is obtained through selling of these assets is then turned over and dispersed among the creditors to clear the debts. If you don’t have any nonexempt assets, your creditors receive nothing. Certain assets are exempted under this chapter like your house, your car, your tools of work or business, and a number of personal items. These exemptions vary from state to state.

After completion of the legal proceedings, the court discharges the borrower from all his debts. He is no longer legally responsible for them and can start over again with a clean slate. However, for the next 10 years, the record of the bankruptcy remains attached with his credit history.

Eligibility
Any person having residence and property, or a business entity in the United States can file for chapter 7. Again, the person should not file just to get out of debt. It will only be considered as valid if the borrower lacks sufficient funds after living expenses, to repay debt. Additionally, he should not have any history of bankruptcies in the past 6 years, and should not have had an application for the same dismissed in the previous 6 months.

Procedure
It is intended to help candid citizens who have inadvertently landed themselves in financial trouble. At first, several forms are needed to be filled out to provide all the information. Try to use computer generated data to fasten the processing. Around 40 days after filing, you have to attend the First Meeting of Creditors. After the meeting, the court discharges the person of all debts within 70 – 75 days.

Chapter 13

Individuals who are in possession of valuable assets that are not covered by exemptions under chapter 7, generally prefer chapter 13. By filing for chapter 7, they could lose their valuable property.

Here, one has to understand the most important and distinguished aspect of this chapter. Contrary to Chapter 7, it does not release all due payments immediately. On the contrary, the debtor offers to pay back the creditors over a short period, usually three to five years. He has to plan his monthly payments based on his income and expenses, and then submit a payment schedule to the court. For this reason, Chapter 13 is commonly referred to as a reorganization bankruptcy.

Eligibility
To be considered eligible for filing, the individual should not have secured debts over USD 1,149,525 and unsecured debts over USD 383,175. In case of possessions like a vehicle, the creditor retains the right of full disbursement of dues if the date of purchase lies within 30 months from the date of filing. Again that individual should not have received a discharge under the same clause within the last 2 years or under chapters 7, 11, or 12 within the last 4 years. Debts due to student loans, penalties for criminal offenses, and drunken driving injuries are not dischargeable under chapter 13.

Procedure
The first step involves the filing of the petition with the court corresponding to the residential area of the debtor. Within 15 days of filing the petition, he has to submit the plan of scheduled payments. The court then appoints an impartial trustee who works as a link between the creditors and the debtor. Within 30 – 50 days of submitting a plan, a meeting of creditors is called. The judge then validates the repayment plan taking all aspects into account. After confirmation of the plan, it is solely the debtor’s responsibility to release the payment on the due dates, failing which the case could be referred to chapter 7.

It is always better to seek the advice and help of an expert lawyer while filing for bankruptcy, as it can be a life-changing decision.

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