The Difference Between Chapter 7 and Chapter 13 Bankruptcy

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The Difference Between Chapter 7 and Chapter 13 Bankruptcy

Most consumers know bankruptcy can eliminate some types of debt, but they are unsure which type of bankruptcy to consider.  There are two types of consumer bankruptcy.  Chapter 7 bankruptcy is a type of personal bankruptcy and can be referred to as straight bankruptcy.  Chapter 13 bankruptcy is another form of personal bankruptcy and is often referred to as reorganization bankruptcy.  While the purpose of both Chapter 7 and Chapter 13 is to help the debtor get back on their feet, each form of bankruptcy accomplishes this in very different ways.

Chapter 7 Bankruptcy: Eliminate Qualifying Debt

In 2005, the United States Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which changed the eligibility requirements for Chapter 7.  The most significant change resulting from BAPCPA is the Means Test.  To qualify for Chapter 7 under the Means Test, a person’s income must be less than the median income for their community.  The easiest way to qualify for Chapter 7 bankruptcy under the Means Test is if your average income over the past six months does not exceed the median income for your location.  Contact a qualified attorney to determine whether you qualify for Chapter 7 bankruptcy.

Chapter 7 will not, however, discharge the obligation to pay secured debt.  To keep property where there is an outstanding loan on that property, the bankruptcy candidate  must complete a reaffirmation agreement.  For instance, many clients have a car payment and do not want to give up their car.  By reaffirming the debt, they can keep the car but must continue to make payments on the loan after discharge.  The same principle applies to real estate property.  Chapter 7 bankruptcy will not eliminate the responsibility to make monthly mortgage payments.  However, many indi viduals can save their home by eliminating credit card debt in order to afford mortgage payments.

Chapter 13 Bankruptcy: Reorganizing Debt

Chapter 13 bankruptcy is designed for individuals with large amounts of debt who do not qualify for Chapter 7.  The distinguishing feature of this type of bankruptcy is the Chapter 13 plan.  The debtor and his attorney develop a Chapter 13 plan and the trustee and creditors approve the plan.  Under the plan, the Chapter 13 debtor must pay back a portion of outstanding debt over a 3-5 year period.  During this time period, creditors cannot contact or harass the debtor.  Once the debtor has completed the plan, the court will grant a discharge of some or all of the remaining debt.

To qualify for Chapter 13, an individual must have unsecured debt below $336,900 and secured debts below $1,010,650.  While Chapter 13 does not eliminate secured debt like Chapter 7, it has the added benefit of modifying or stripping down certain secured assets.  For example, if the individual owns a home with both a first and second mortgage and the value of the first mortgage exceeds the current value on the home, you may be able to strip off the second mortgage.  Such a strip down is one of the features of Chapter 13 to consider when determining which type of bankruptcy is best before filing.

Both Forms of Bankruptcy Provide Relief

Contact an attorney to discuss your options and determine which type of bankruptcy, if any, is right for you.   If you wish I can be reached at for a free evaluation of your situation.

Benjamin Yrungaray handles bankruptcy and loan modification cases at First Source Law. He is a member of the state bar of California (#256224), Pennsylvania (#208558), and New Jersey (pending). He lives in Orange County and works for Higbee and Associates law firm.

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