The Difference Between Chapter 7 and Chapter 13

When it comes to bankruptcy, Chapter 7 and Chapter 13 serve different purposes and suit different financial situations.  

The crux of the difference lies in how they handle your debts. Chapter 7 involves liquidating non-exempt property to pay off what you owe, whereas Chapter 13 allows you to create a repayment plan to settle your debts over three to five years. 

But of course, there's more to it than that. 

Chapter 7 Bankruptcy: What You Need to Know 

Chapter 7 bankruptcy, often called 'liquidation' bankruptcy, is a process designed for debtors in financial distress who cannot pay their existing debts. This bankruptcy option provides a fresh start by discharging most unsecured debts, such as credit card debts and medical bills.  

Certain debts, such as alimony, child support, student loans, and some tax obligations, are not dischargeable in Chapter 7 bankruptcy.  

Eligibility 

To qualify for Chapter 7, individuals must pass a means test, which compares their income to the median income for their state; if their income is too high, they may have to file under Chapter 13 instead. 

The Process 

The Chapter 7 process starts with the debtor filing a petition with the bankruptcy court serving their area. Along with the petition, the filer must provide a schedule of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executory contracts and unexpired leases.  

Debtors must also submit a certificate of credit counseling and any debt repayment plan developed through credit counseling. 

Once the petition is filed, an automatic stay goes into effect which halts most collection efforts, wage garnishments, and legal proceedings against the debtor. A bankruptcy trustee is appointed to oversee the case. The trustee’s role includes liquidating any non-exempt property to pay off creditors.  

It’s important for debtors to understand that while many assets may be exempt from liquidation, such as personal belongings and tools needed for work, others like a non-primary residence or extra vehicles may be sold. 

After non-exempt assets are liquidated and creditors have been paid to the extent possible, the court typically discharges the remaining unsecured debts, meaning the debtor is no longer legally required to pay them.  

The entire Chapter 7 bankruptcy process can take anywhere from three to six months, making it a faster option compared to Chapter 13. 

The Details of Chapter 13 

Chapter 13 bankruptcy, known as a wage earner's plan, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years, depending on their monthly income. 

Advantages 

One of the primary benefits of Chapter 13 over Chapter 7 is the ability to save your home from foreclosure. By filing under Chapter 13, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Additionally, Chapter 13 may protect third parties who are liable with the debtor on consumer debts, and it provides a means to deal with secured debts more gradually. 

Eligibility 

Eligibility for Chapter 13 requires the debtor to have a regular income and meet debt limitations as set forth by the bankruptcy code. These limitations are periodically updated and can be confirmed with a bankruptcy attorney. 

The Process 

The filing process for Chapter 13 bankruptcy starts with submitting a petition to the bankruptcy court serving the individual’s area, similar to Chapter 7. However, the filer also proposes a repayment plan that details how they will pay off their debts over the course of the three- to five-year period. After filing the petition and repayment plan, a trustee is appointed to administer the case. The trustee facilitates the distribution of payments to creditors and ensures that the debtor adheres to the terms of the repayment plan. 

During the repayment period, the law forbids creditors from starting or continuing collection efforts. This comprehensive approach allows individuals to reorganize their finances under the court's protection and oversight while working toward debt elimination. 

Completing a Chapter 13 plan can be rewarding since debtors are often able to keep their property and become financially stable, but it requires discipline and commitment to make regular payments and adhere to the terms set forth by the court. 

Explore Your Options With an Attorney 

So which chapter is right for you? Maybe you qualify for Chapter 13, but are more attracted to the timeliness of Chapter 7. There are benefits and drawbacks to both, so it's key to weigh your options carefully.  

Plus, every financial situation is unique, and you want to pursue the debt-relief path that makes the most sense for your family. That's why we're here to help. We’ll help you understand your options and advise you on which strategies are ideal for your current debts and long-term goals. 

Navigating bankruptcy isn't easy, but you don't have to do it alone. Call Atchley Law Firm, PLC, and let us guide you through this complex process, providing the professional assistance you need to make informed decisions about your financial future. 

Our team is dedicated to providing excellent legal assistance to individuals throughout Mesa, Gilbert, Tempe, Chandler, and the Phoenix Metro Area.