Chapter 7 Versus Chapter 13

Most people in the United States either file Chapter 7 or Chapter 13 bankruptcy, depending on a number of factors including  income, assets, debts and more. Here is an in depth look at the differences between Chapter 7 and Chapter 13 bankruptcy. 

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is widely considered the liquidation bankruptcy. One can only qualify to file for chapter 7 if they receive low income and have little to no assets. Upon filing a Chapter 7, the bankruptcy courts assign a trustee to review your case. During this time, the trustee will analyze your financial information like your income, bankruptcy papers, debts, and non exempt assets. The trustee will then sell your non exempt items to pay back creditors. 

What is a Non-Exempt Asset?

Non-exempt assets are assets that may be sold to creditors to repay debt in a Chapter 7 bankruptcy. Examples of non-exempt assets include cash, savings, stocks, bonds, valuables or collectables that are not considered necessities for the household, and secondary properties and vehicles. 

Exempt assets are assets that cannot be used to pay debt. Some examples include necessities like clothing, household appliances, pensions, government benefits like social security, welfare, and unemployment. 

Chapter 13 Bankruptcy 

Chapter 13 bankruptcy is also known as the reorganization bankruptcy, where debtors may set up a repayment plan with their creditors to pay off all or some of the debt. Debtors must qualify to file a chapter 13 by receiving less than a certain amount of income specified by the bankruptcy courts. Most people that file a chapter 13 are those that can afford to pay some of their debts. A bankruptcy trustee works with the debtors in setting up a payment arrangement to reduce the debt within 3 to 5 years. Chapter 13 also helps for those that are facing foreclosure, or have liens on their properties or vehicles. 

Effects of Filing Bankruptcy

Filing bankruptcy may have a long lasting effect on a person’s credit. After wiping out debt in a few months of work, Chapter 7 bankruptcy will still remain on your credit for 10 years. Filing a Chapter 13 can remain on your credit for 7 years, because it requires a repayment plan in which you pay off some of the debt that is owed rather than having it all wiped out. Having a bankruptcy on your credit history can have significant impact on your financial goals. Bankruptcy can affect your chances of securing credit cards, loans, mortgages, auto loans, and more.