What is the difference between chapter 7 and chapter 13?

A bankruptcy specialist can best help you decide whether to file chapter 7 or chapter 13 bankruptcy.

A bankruptcy specialist can best help you decide whether to file chapter 7 or chapter 13 bankruptcy.

As an Asheville Bankruptcy attorney I am often asked the difference between chapter 7 and chapter 13 bankruptcy. Before I describe the differences, it is important to understand the similarities. First of all, regardless of whether you file for bankruptcy under chapter 7 or chapter 13, you will be filing bankruptcy and thus be subject to the jurisdiction of the Bankruptcy Court and the rules set forth in the Bankruptcy Code (Title 11 of the United States Code). Occasionally, I hear people refer to chapter 7 as “true bankruptcy”. I’ve even heard people say that chapter 13 is “not bankruptcy”. These statements are incorrect because both chapter 7 and chapter 13 bankruptcies are “real” and “true” bankruptcy cases. Additionally, both types of bankruptcies require the filing of a petition, which is an informational document regarding your finances. Most cases under chapter 7 and chapter 13 result in a discharge of the debt, which simply means that the pre-bankruptcy debt is extinguished. Finally, under most circumstances all debt collection activity is required to stop (called the “automatic stay”) one a bankruptcy petition is filed under either chapter 7 or chapter 13.

The differences are many, but the primary difference is that that chapter 7 is a “straight” or “liquidation” bankruptcy and chapter 13 is structured debt repayment plan. I describe each chapter in detail in my website. Click here to read about each one: Chapter 7 and Chapter 13.

Chapter 7: A debtor does not enter into a repayment plan in chapter 7. Instead, the bankruptcy Trustee will review the debtor’s financial circumstances to see if there are any assets that can be liquidated (ie, sold) and the proceeds paid to creditors. Additionally, the Trustee may seek to set aside certain types of transactions that occurred prior to filing, such as preferences and fraudulent transfers.

Chapter 13: In contrast, a chapter 13 Trustee generally does not liquidate a debtor’s assets, nor seek to set aside pre-bankruptcy transactions. Instead, the debtor makes monthly payments to the Trustee for 3-5 years. The Trustee distributes the monthly payments to creditors. A chapter 13 can help a debtor avoid a foreclosure by making payments to catch up past due mortgage payments. It can also impose a payment plan on the IRS or the NC Department of Revenue (I practice in NC) and stop tax garnishment. Each chapter has its “pros” and “cons”. A bankruptcy specialist can talk with you about the best chapter for you.

At Kight Law Office, we have represented parties in over 2000 bankruptcy cases before the WNC Bankruptcy Court. Attorney and Bankruptcy Specialist Rod Kight has consulted with literally thousands of individuals about chapter 7 and chapter 13. Contact us today and complete our free online bankruptcy evaluation to discuss which chapter will best solve your financial problems.