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What is the difference between Chapter 7 and Chapter 13?

When it comes to personal bankruptcy, Chapter 7 is by far the most popular option. But it isn’t the only option. Chapter 13 bankruptcy is also a possibility for people who don’t qualify for Chapter 7 or who would benefit greater from filing for Chapter 13.

Essentially, a Chapter 7 bankruptcy means that your debts are “wiped clean.” After your assets have been liquidated to pay off all debts possible, you can say good-bye to your remaining debts and start fresh.

In a Chapter 13 bankruptcy, you are essentially reorganizing your debts to pay off as much as possible over a three-to-five-year period of time. After the time period has passed, any remaining debts are then “wiped clean.” It is also worth pointing out that interest does not accrue during a Chapter 13 debt reorganization plan.  

Other factors that set Chapter 13 bankruptcy apart from Chapter 7 bankruptcy:

  • You don’t have to pass the “means test” that applies to Chapter 7 bankruptcy. Many people who don’t qualify for Chapter 7 bankruptcy because they earn too much are often able to qualify for Chapter 13 bankruptcy.
  • The reorganization plan isn’t always successful. Only about one-third of all Chapter 13 filers are able to complete their repayment plan and have their remaining debts discharged. That’s because it can be difficult to take on the additional payments for past debts on top of regular bills.
  • You must have a steady form on income to qualify for Chapter 13 bankruptcy. It is possible for self-employed people to qualify, but they must have a steady source of income so that the repayment plan can be successful. There is also a limit on unsecured and secured debts, which is $383,175 and $1,149,525, respectively.
  • It’s often possible to save your home through Chapter 13 bankruptcy if you are behind on your loan payments. It’s also possible to avoid losing your home through Chapter 7 bankruptcy, but usually only when you are current on your loan payments and you have little equity in the home.

In order to determine which type of bankruptcy would be best for your situation, talk to an experienced bankruptcy lawyer in your area.

Source: Investopedia.com, “The Other Personal Bankruptcy Option: Chapter 13,” Daniel Kurt, Sept. 30, 2014

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