Individuals who are considering bankruptcy to obtain relief from overwhelming debt must generally choose between chapter 7 and chapter 13 of the Bankruptcy Code. Chapter 7, known as debt “liquidation,” wipes out all or most of your debt. Chapter 13, known as “debt reorganization,” is a debt repayment plan that is administered by the Bankruptcy Court.
Whether you are eligible for one or the other or both, and which one is right for you, depends upon your circumstances.
How does chapter 13 differ from chapter 7?
While a chapter 7 bankruptcy ends with a discharge that (with a few possible exceptions) completely wipes out your debt without requiring you to pay any of it, debtors who file a chapter 13 bankruptcy repay their debt over a period of three to five years. Some creditors must be paid in full. You can pay a percentage of other debts and receive a discharge of those debts when the plan is completed, provided the Bankruptcy Court is satisfied that you made your best effort to pay those debts.
What are the benefits of a chapter 13 bankruptcy?
When you file under chapter 7, a bankruptcy trustee is appointed who has the power to sell certain property you own. The proceeds of the sale are used to satisfy your creditors. A chapter 13 bankruptcy allows you to keep your property while our repayment plan is in effect and after a discharge is granted.
In addition to letting you keep your property, a chapter 13 bankruptcy has significant advantages for certain debtors. These include:
- Repayment of nondischargeable debts. Some kinds of debt (including student loans and most taxes) generally cannot be discharged in a chapter 7 bankruptcy. Chapter 13 allow you to repay those debts over a period of years.
- Avoiding foreclosure or repossession. If you fall behind on your mortgage payments or car loan and are facing foreclosure or repossession, a chapter 7 bankruptcy might not help you keep your house or car. A chapter 13 plan can put collection efforts on hold to give you a chance to make up missing payments and keep your house or vehicle.
- Protecting co-borrowers. If someone co-signed a loan that you discharge under chapter 7, your co-debtor can usually be held responsible for the balance of the loan. Including the debt in a chapter 13 plan can prevent the creditor from pursuing your cosigner for repayment of the loan.
- Repaying debts that are important to you. Sometimes debtors don’t want to wipe out their debt. They like to know that they have made their best effort to pay their debts, particularly if they owe money to friends, family members, or businesses with which they want to maintain a good relationship.
Who is eligible for a chapter 13 bankruptcy?
Some people cannot file under chapter 7 because their income is too large. When Congress passed the Bankruptcy Reform Act, it limited chapter 7 liquidations to debtors who lacked the income to make a good faith effort to repay their debts. Debtors who do not qualify for chapter 7 relief must generally file under chapter 13 if they want bankruptcy relief.
Still, not all debtors can file under chapter 13. Since you will be making regular payments to the bankruptcy trustee, you need to have a regular source of income. To qualify for chapter 13, you must have enough income to pay your monthly expenses and to repay your debts, in whole or in part, on a schedule that is approved by the Bankruptcy Court.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.