Differences Between Chapter 7 and Chapter 13 Bankruptcy
July 31, 2009 by Stacy42 · 3 Comments
Most personal bankruptcies in the US are either what is called “Chapter 7″ or “Chapter 13″. What do these terms mean and which one of these is right for you if you are thinking about filing bankruptcy?
Chapter 7 and Chapter 13 refer to the respective chapters of the United States Tax Code which describes the way the bankruptcy is conducted by the courts. Although personal bankruptcies fall under the purview of Federal bankruptcy laws, State laws pertaining to property rights will often come into play during the course of bankruptcy proceedings.
The relatively simple Chapter 7 bankruptcy is by far the most commonly filed type of personal bankruptcy. Chapter 7 bankruptcies involve the complete liquidation of debt upon sale of the debtor’s non-exempt assets. Chapter 7 is used where a person has very little property and very few assets that have any value.
In practice, most debtors filing bankruptcy under Chapter 7 have no home, a relatively modest income, and little or no non-exempt assets of value to sell. In Chapter 7 cases virtually all debts are completely discharged while the debtor can retain specific types of personal property.
Chapter 13 bankruptcies are a little more involved and pertain to people and businesses with non-exempt assets. They involve a legally binding repayment plan, in addition to the sale of non-exempt assets.
Chapter 13 filings allow a homeowner with regular income to avoid foreclosure while his or her debt is restructured. In the case of a business it allows the business to continue to operate while new arrangements are worked out with creditors.
The primary objective of Chapter 13 bankruptcy is to give an individual or business breathing space to work out an arrangement with creditors. Normally the debt is restructured so the debtor can afford regular payments and not be forced to sell their home. Most who have serious debt issues but who own homes, earn an above average income, or own valuable personal property, file chapter 13 bankruptcy.