Differences Between Chapter 7 and Chapter 13 Bankruptcy

If you are facing serious financial hardship and are contemplating bankruptcy, you’ll need to decide what type of bankruptcy might be best for you. Chapter 7 and Chapter 13 are the most common choices, and while they share the ultimate goals of protecting you from creditors and relieving you of your debts, the way those goals are accomplished differs greatly depending on which path you choose.

These are the basic differences between Chapter 7 and Chapter 13:

• Immediate debt discharge vs. debt reorganization — Chapter 7 allows you to discharge (wipe out) most of your unsecured debts. Chapter 13 is a reorganization plan, under which you repay part of the debts over three to five years and then receive a discharge of your remaining debts.
• Eligibility — In order to file a Chapter 7, your disposable income must be low enough to pass the “means test.” Chapter 13 has no income requirement, but your total unsecured debt must be less than $465,275 and your total secured debt must be less than $1,395,875.
• Time frame — Chapter 7 cases typically take around four months to complete while Chapter 13 normally involves a three-to-five-year repayment plan.
• What happens to your property — In Chapter 7, some of your property might be sold (liquidated) to repay creditors but most of your assets may be exempt from sale. In Chapter 13, you keep all your property but you must adhere to the repayment plan to satisfy unsecured creditors.
• Foreclosure — Chapter 7 puts an immediate but temporary halt to foreclosure on your home. The foreclosure will eventually continue unless you can become current on your mortgage. Chapter 13 also temporarily stops foreclosure and your mortgage arrears can be paid off as part of your repayment plan. However, your mortgage remains in effect and you must make timely payments going forward.

The main benefit of Chapter 7 is its ability to eliminate debt quickly and get you a fresh financial start. Consumer debts like medical bills, credit card debt, utility bills and personal loans get wiped away. On the negative side, your disposable income must be fairly low in order to qualify. And there is a chance you could lose some of your property if it doesn’t qualify for an exemption.

Chapter 13’s main benefit is that it allows you to consolidate all your debts into a single, manageable monthly payment. After three to five years, any remaining debt is wiped away. You get to keep your property and catch up on past-due house and car payments. Chapter 13’s main drawback is that you have to earn enough income to be able to make your payments under the plan.

If you are considering filing for bankruptcy, the lawyers at Gesmonde, Pietrosimone & Sgrignari, L.L.C. can help you decide whether Chapter 7 or Chapter 13 is right for you. We can also explain other available debt relief options. Call 203-745-0942 or contact us online to get in touch with our Hamden and East Haven attorneys today.