Before explaining how the bankruptcy chapters 7 and 13 differ, it's important to note the following. If you plan to file personal bankruptcy, you're not allowed to choose the bankruptcy chapter. For example, you can't file Chapter 7 because you like it better than repaying debts under Chapter 13. The type of bankruptcy chapter you file depends on factors such as your debts and income.
Chapter 7 Eliminates Your Unsecured Debts
Chapter 7 eliminates or wipes out, most of your unsecured, general debts. That's why it's called liquidation bankruptcy. The way it is supposed to work is simple. A bankruptcy trustee over your case takes certain possessions from you that are not exempt. They sell the possessions and distribute the proceeds to your creditors.
Most people who file bankruptcy don't have property that can be liquidated to pay credits. You are probably in the same situation. If this is the case, you'll file a straight Chapter 7 bankruptcy. Your debts are eliminated. This means you don't repay credits.
Chapter 7 is Only for Unsecured Debts
There are different types of debts. For example, you have unsecured and secured debts. Secured debts are backed by collateral. If you don't repay, the creditor gets the collateral. Unsecured debts are different. These debts are based on your promise to pay. If you don't pay, your creditor may turn off service or sue you to obtain the money owed.
Chapter 7 has a Specific Automatic Stay
When you file for Chapter 7 bankruptcy, you receive an automatic stay. An "automatic stay" is a powerful tool which gives you relief from your creditors' actions. These actions include turning off service, filing a lawsuit or garnishing your wages to get the money owed to them.
An automatic stay allows you to have services restored such as utilities and phone service.
Chapter 7 Takes Less Time
This type of personal bankruptcy is completed quickly. Most cases are finished within three to six months. However, it may take approximately a year.
Chapter 13 Allows You to Pay Creditors Over a Time Period
The biggest difference between Chapter 13 and Chapter 7 is the repayment requirement. In Chapter 13, you're required to repay credits the amount you owe them in three to five years. The payments depend on the amount of money owed to creditors. You must pay this monthly amount to the bankruptcy trustee over your case. The trustee will distribute to your creditors.
In addition to making monthly payments to the trustee, you will continue to pay your current payments to creditors. Once you finish making your payments to the trustee, your arrearage is eliminated, and you can continue to make your current payments.
Chapter 13 Takes the Longest Time to Complete
As mentioned above, Chapter 13 is a three-to-five year process. You must make your trustee payments and current payments on time each month. The specific time depends on your debts, income and other factors. For example, one person's bankruptcy may take five years to complete. Your bankruptcy may take three years to complete.
Chapter 13 Stops Foreclosure and Property Auctions
The automatic stay provision was mentioned in the section about Chapter 7 bankruptcy. However, a Chapter 13 automatic stay works differently than the one in the other bankruptcy chapter. It's more powerful.
A mortgage is a secured debt. This means that you put your house up as collateral to secure the mortgage. When you fall behind in your mortgage, your lender can foreclose on your property. They can also auction the property to get the money you owe them.
If you file for Chapter 13, its automatic stay immediately halts any foreclosure actions against you. This means your creditor can't pursue anything such as a lawsuit to obtain your home. In addition, it immediately takes your property off the auction block as long as it hasn't been sold.
Chapter 13 is for Secured and Unsecured Debts
Unlike Chapter 7, you can include both secured and unsecured debts in your Chapter 13 bankruptcy petition. This means you can pay your credit card bills and secured debts such as your car or mortgage lenders at the same time.
The Major Difference between Chapter 7 and Chapter 13 is Income
Before filing any bankruptcy chapter, you must qualify. This change occurred in 2005. To qualify for Chapter 7, your income level must be low. This means you don't have enough income after you pay your current monthly bills, to pay creditors. The income level depends on your state income level for your household.
If you have enough money left over, called disposable income, you may qualify for Chapter 13. The reason why you need disposable income is to make those monthly payments to the trustee for three to five years. The way that you find out if you qualify for Chapter 7 or Chapter 13 is by using the government's means test. The test subtracts your income from the state income level for your household. Finding your income involves first subtracting your expenses from your income. You subtract the remaining balance from the state income level for your household. If there is money left over, you qualify for Chapter 13. If you have disposable income left, you qualify for Chapter 7.
To understand more about the differences between Chapter 7 and Chapter 13, contact a bankruptcy professional such as a lawyer. You also want to seek help to determine if you qualify for personal bankruptcy. If you decide to file for bankruptcy, the law requires you to hire a bankruptcy lawyer to represent you at your Creditors' meeting and throughout your bankruptcy process.