Qualifications and Advice For Chapter 7 and Chapter 13 Bankruptcy

Qualifications and Advice For Bankruptcy

With all the different types of bankruptcy, it can be daunting to decide which type is better for your situation. So what are the main differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy?

In either type of bankruptcy filing, there are limits to how often an individual can file bankruptcy.  In Chapter 7 bankruptcy, a debtor must not have received discharge from either Chapters 7 or 11 bankruptcy in 8 years, and no discharge from Chapter 13 in 6 years. For Chapter 13 bankruptcy, there must have been no discharge from Chapters 7 or 11 in 4 years, and no discharge from Chapter 13 in 2 years.

The main difference is that Chapter 7 bankruptcy liquidates your debt and Chapter 13 bankruptcy reorganizes your debt. Liquidating your debt takes far less time – only about 3-4 months. Reorganizing your debt takes 3-5 years, during which time the individual pays monthly payments to the court, which is then disbursed towards the balance of the debt. These payments are agreed upon between the individual filing debt and the court based on the debt repayment plan set forth at the time of the Chapter 13 bankruptcy hearing.

Both types of bankruptcy filings require that the individual makes an analysis of their income and expenses. In Chapter 7 bankruptcy, there is no limit to the amount of debt to be discharged, and the individual doesn’t need to have any income. However, in Chapter 13 bankruptcy, the individual filing bankruptcy must have an income and his or her debt must not exceed a certain amount (which is set forth by the bankruptcy code).

Another major difference is how home and automobile loans are treated in the different types of bankruptcy hearings. Because Chapter 7 bankruptcy discharge is achieved in only 3-4 months, an individual is brought current on delinquent payments quickly. However, since a debtor is paying off their loan in 3-5 years under Chapter 13 bankruptcy, it takes that amount of time until he or she is awarded a discharge of debts. That means that Chapter 13 bankruptcy takes far longer until the debtor is current on monthly payments.

The trade-off for the longer time line is that under Chapter 13 bankruptcy second mortgages can often be stripped and automobile loans can be brought to current market rates. In Chapter 7 bankruptcy, there is no loan modification for mortgages, and loan modification in automobile loans is relatively rare. Finally, filing Chapter 13 bankruptcy protects co-debtors (or co-signors) while Chapter 7 bankruptcy does not.