What is the difference between Chapter 7 and Chapter 13 bankruptcy?
- Chapter 7 permits individuals to discharge certain debts and protects debtors from harassment by creditors. It is intended to provide relief to persons who do not have enough disposable income to pay toward any of those debts, unlike Chapter 13, which is for people who do have the ability to pay off some of their debts. In general, Chapter 7 is an appropriate choice for a debtor who has little property or no equity in his property, and whose financial circumstances are such that there is no hope of repaying the debt through a payment plan.
- Chapter 13 is for persons who are able to pay their creditors a part, but not all, of what is owed. It permits them to reorganize their debts by making monthly payments from their disposable income under a payment plan approved by the Court. If your current monthly income is less than the applicable state median income, then the payments will be for three years. If your currently monthly income is more than the state median income, the plan must be for five years. At the end of the approved payment plan, the remainder o the unsecured debts are discharged. Under Chapter 13, after the court approves a repayment plan, the debtor makes monthly payments to the trustee, who distributes them among creditors. Once all payments required under the plan have been made, the debtor is generally entitled to a discharge, which releases him from all debts provided for in the plan, except for certain debts that are not dischargeable. Examples of some of the nondischargeable debts are debts incurred through fraud, certain delinquent taxes, child support and alimony obligations, certain educational loans, and homeowners association dues incurred after the filing of the petition, among others. The debtor will remain obligated to pay nondischargeable debts even after receiving a general discharge in bankruptcy.
- With regard to debt secured by real or personal property, a Chapter 13 debtor is allowed to cure his arrearages by making monthly payments and keeping the secured property, whereas in Chapter 7, non-exempt property is subject to being sold or abandoned to creditors to satisfy debts. Therefore, Chapter 13 offers a major benefit for a debtor who is facing foreclosure on his delinquent mortgage. Chapter 13 provides a way to catch up on the delinquent payments over time by including them in the Chapter 13 repayment plan. In this way, a homeowner can avoid foreclosure if the debt that is in default is his home mortgage, and his disposable income is sufficient to pay off the past due balance over the course o the plan.