The difference between Chapter 7 and Chapter 13
Chapter 7 bankruptcy provides for a complete discharge.
Chapter 13 bankruptcy is a debt adjustment procedure for individuals with regular income, who have unsecured debts under $269,250 and secured debts under $807,750. Under Chapter 13, you pay back part of your debt over 3-5 years.
In a Chapter 13 the debtor files a bankruptcy petition with schedule of assets and liabilities and statement of financial affairs, along with a Chapter 13 plan. The plan provides for repayment of the debtor’s debts over a 3-5 year period, from the future earnings of the debtor. A trustee is appointed to receive payments from the debtor and then disburse them to creditors.
In this plan the debtor remains in possession of all of his property, exempt and non-exempt. Upon completion of payments under the plan, the debtor typically receives a discharge, even if he has paid less than 100% of the debt. Certain debts, however, must be paid in full to be discharged, such as:
- Certain child and spousal support debts
- Debts caused by the debtor’s drunk driving
- Recent taxes
The debtor attends a meeting of creditors. Creditors are not entitled to vote on the plan, but are allowed to file objections to the plan if they believe that the plan does not comply with Chapter 13 requirements.
With Chapter 13, you can repay past due home or car loans over time. You may also have the availability of stripping and/or avoiding certain secured debt. We will go over those options with you. But beware, many clients default in a Chapter 13, making some payments, then failing, resulting in having to file a Chapter 7 anyway.
Creditors will receive differing amounts of money under a Chapter 13 plan, depending on the nature of the debt, i.e., whether priority, unsecured non-priority, or secured. Priority debt typically includes recent taxes (generally less than 3 years old), and certain spousal and child support claims.
Unsecured non-priority debts include older income taxes (generally, more than 3 years old), credit card debt, medical bills, personal loans, and any deficiency claims. Secured debts include real estate mortgage loans, car loans, and furniture and jewelry loans. The debtor making payments to the trustee, and the trustee then makes these payments to the creditors.
