3 Key Differences Between Chapter 7 Bankruptcy And Chapter 13

Posted on: 10 December 2015

One benefit you receive by hiring a lawyer to help you file bankruptcy is his or her advice about which chapter to file. The two main options you have are Chapter 7 and Chapter 13, but there are some key differences in these options. While one of these options might be better for one person, the other option might be better for you. By understanding these three differences, you may have a better understanding of how each type works, and this may help you know which option is better for you.

Income Restrictions

A key difference between Chapter 7 and Chapter 13 is the income restrictions involved with qualifying for bankruptcy. One of the first steps your lawyer will suggest when you meet with him or her is running a means test. This test compares your current and recent income to the median, or average, income in your state. The results of this test will determine if you are even eligible for Chapter 7. If you are not, you may have to use Chapter 13 if you want to file for bankruptcy.

The means test is used as a way of preventing people from abusing the bankruptcy system. It offers a way for people with lower income to get debt relief, while it holds people with higher incomes accountable for repaying some or all of the debt they owe.

Debts That Are Discharged

No matter which type of bankruptcy you use, there will be certain debts that cannot be discharged. This includes debts such as alimony and child support, and it also includes most student loan debts and taxes owed to the government.

On the other hand, there are debts that can be discharged in bankruptcy, and this primarily includes most unsecured debts, such as medical bills or credit card bills. If you have unsecured debts, bankruptcy can help you eliminate the debts, but the amount discharged will depend on the type of bankruptcy you file and on your income.

Through a Chapter 7 bankruptcy, all unsecured debts will be discharged, unless a creditor objects to this and wins. In Chapter 13, you will be placed on a repayment plan for a certain number of years. This is typically between three to five years, but the exact length will depend on the amount of income you earn and on the expenses you have.

When a Chapter 13 bankruptcy is complete, you may have paid 100% of your unsecured debts off, or you may have only paid a portion off. Every case is different, and your attorney can help you understand how this works.

How Foreclosures Are Handled

A third difference in the way these two chapters of bankruptcy work involve the way foreclosures are handled. When you file either type, the court will grant you an automatic stay. This means that all creditors must cease all collection efforts from you, and this includes foreclosures.

The difference is that a Chapter 7 automatic stay for a foreclosure will only be temporary. Your lender must immediately stop the proceedings; however, the creditor can begin them again after the bankruptcy case is settled. This means that a Chapter 7 bankruptcy may not help you save your house from foreclosure.

Through a Chapter 13 bankruptcy, you will have the opportunity to work out a new payment arrangement with your lender, and this will stop the foreclosure from happening. You must make the payments required in the plan for this to happen though.

Filing for bankruptcy can be a good way to find relief from debt, but it is best to seek advice about which branch to file before you make any decisions. Click here for more info about bankruptcy attorneys and filing for your bankruptcy.