What is the difference between Chapter 7 and Chapter 13 bankruptcy?


Bankruptcy is a legal process available to most individuals and married couples that permits a person or married couple to either eliminate most types of consumer debt (Chapter 7) or propose a repayment plan under bankruptcy court supervision (Chapter 13).  Most, but not all, individuals or married couples are eligible for either Chapter 7 or Chapter 13.  Sometimes an individual or married couple have a choice about which type of bankruptcy they can file.  The type of debt you have can be an important factor in determining which type of bankruptcy is most beneficial.   There are important differences between Chapter 7 and Chapter13 bankruptcy.  

CHAPTER 7 BANKRUPTCY:  Chapter 7 bankruptcy is filed primarily by individuals, married couples (who meet qualification criteria) or small businesses (who cease business) to eliminate debt and achieve a “fresh start.”  When a Chapter 7 bankruptcy is filed you are granted an automatic “stay” on creditor collection.  This means that once a Chapter 7 bankruptcy is filed creditor collections efforts and tactics, including wage garnishment, court hearings, lawsuits, phone calls, letters and other forms of creditor harassment must stop.  If a creditor fails to stop collection efforts after being notified of the filing of a Chapter 7 bankruptcy that creditor may be subject to punishment.  Once the bankruptcy process is concluded most debts are “discharged,” which means eliminated.  Individuals or married couples or receive a discharge in Chapter 7 bankruptcy are no longer legally liable for discharged debts.  Creditors whose debts are discharged cannot legally collect on those debts and in fact may not make any effort to collect on a discharged debt.  A Chapter 7 bankruptcy discharge erects a barrier to any further collection efforts.  Keep in mind that there are some types of debt that cannot be discharged in bankruptcy  including most student loans, most tax debt, alimony, child support, debts arising out of a divorce, court fines such as speeding tickets, debts that were a result of auto accidents involving intoxication, debts that are a result of criminal activity and debts incurred through fraud.  Secured debt, such as debt that is tied to a car, home, furniture, appliances or other collateral must be paid if you want to keep the property that is tied to the debt.   Understandably, you may have questions or concerns about potential Chapter 7 bankruptcy.  Here are some concerns that we frequently address:

CHAPTER 13 BANKRUPTCY: Chapter 13 bankruptcy is a court supervised reorganization 
and repayment plan that permits individuals and married couples who have a steady and reliable source of income to propose a Plan to their creditors to repay some or all of their debt over time, usually a three to five year period.  A Chapter 13 bankruptcy requires a monthly payment. The amount of the monthly payment depends upon the household income and expenses as well as the type and amount of debt that needs to be paid through the repayment plan.  Chapter 13 may permit you to propose a plan to cure defaults on car loans, home mortgages, student loans and child support.  Filing a Chapter 13 bankruptcy can stop a Sheriff’s sale of real estate, rescue a home from foreclosure and permit repayment of the missed mortgage payments over time.  You may be able to eliminate second mortgages and combine payments on cars and other secured debt into one affordable monthly payment.  Depending on a person or married couples’s circumstances it is possible that some debt (unsecured debt) can be eliminated without a substantial amount of that debt being repaid.  Like a Chapter 7 bankruptcy, filing a Chapter 13 bankruptcy stops wage garnishments as well as other collection activities.  In the end, for most Chapter 13 bankruptcy candidates, a discharge eliminates unsecured debts not paid during the term of the Chapter 13 bankruptcy.  If you have questions about whether Chapter 13 bankruptcy is an option for you, the experienced bankruptcy attorneys at Kinkade & Associates would be pleased to meet with you and discuss your situation.                 

If I file Chapter 7 bankruptcy will I lose what I own?  

This is one of the most frequently expressed concerns expressed by individuals or married couples considering Chapter 7 bankruptcy.  The facts are that most individuals or married couples who are eligible for Chapter 7 bankruptcy can keep their home, their vehicles, their furniture, their retirement accounts and their other possessions.  Every person or married couple who files Chapter 7 bankruptcy is entitled to keep property worth up to a certain amount that is set by law.  The vast majority of individuals and married couples who file Chapter 7 bankruptcy keep everything they own.  It is very important to keep in mind that there are limits to the value of property you can keep in a Chapter 7 bankruptcy and not all types of personal property and other assets are protected in a Chapter 7 bankruptcy.  You must consult a knowledgeable bankruptcy attorney to learn the details of what types of assets can be protected and the limits of that protection.  In that case you may be eligible to consider a Chapter 13 bankruptcy.

If I file Chapter 7 bankruptcy will  I ever be able to have credit again, buy a car on credit or qualify for a mortgage?   

The fact is that most individuals and married couples who receive a Chapter 7 bankruptcy discharge are able to re-establish their credit worthiness in a relatively short period of time.  Each individual or married couples situation is unique.  Often, what folks do after a bankruptcy is more important than the fact that a bankruptcy was filed.  
In other words, there is hope.

If I work and have income can I file a Chapter 7 bankruptcy? 

The fact is that most individuals or married couples who qualify for and then file Chapter 7 bankruptcy do have income from working.  Although there are limits to the amount of household income an individual or married couple can earn and still qualify for Chapter 7 bankruptcy, statistically most candidates for bankruptcy do qualify for Chapter 7 bankruptcy.  Each person’s situation is different and the income test used to determine who may qualify for Chapter 7 bankruptcy should be performed by a qualified and experienced bankruptcy attorney.      

Do I qualify for Bankruptcy?

There are qualification criteria for each type of bankruptcy, Chapter 7 or Chapter 13.  However, the fact is that most individuals or married couples who need bankruptcy relief can and do qualify for bankruptcy relief, either Chapter 7 or Chapter 13 bankruptcy.  The analysis necessary to determine eligibility for Chapter 7 or Chapter 13 bankruptcy is complicated and depends on each individual or married couple’s situation.  You should consult with an experienced Kinkade & Associates bankruptcy attorney regarding your situation and which bankruptcy is right and available for you.          

What are the potential benefits of bankruptcy?

The potential benefits of bankruptcy depend on a person or married couple’s circumstances.  Filing Chapter 7 or Chapter 13 bankruptcy stops most lawsuits and most other types of creditor collection activities including most garnishments (there are limited exceptions such as on-going child support and court fines) and repossessions of your property.  Chapter 13 bankruptcy permits those who are eligible for Chapter 13 bankruptcy to propose a reorganization and repayment plan  that can stop and prevent home foreclosure, cancel sheriff’s sales of real estate, possibly eliminate second mortgages, reduce auto installment payments and provide a way to repay other debt such as taxes and student loans.         

Can I file bankruptcy to save my home from foreclosure?

Yes, Chapter 13 bankruptcy may be an option to stop home foreclosures and permit a homeowner to catch up missed mortgage payments over time.  Filing a Chapter 13 bankruptcy stops a scheduled Sheriff’s sale.             

How soon can I begin rebuilding my credit after filing bankruptcy?

Almost immediately.  Although there are many factors to consider in meeting your goal of rebuilding your financial life, most individuals and married couples who choose to file bankruptcy can begin rebuilding their financial life after the bankruptcy is discharged and troublesome debt is discharged.

Will filing bankruptcy protect my car from repossession?

One of the potential benefits of Chapter 13 bankruptcy is that it is possible to propose a repayment plan that will protect a vehicle from repossession.  Generally speaking, this benefit is not available when a Chapter 7 bankruptcy is filed.  It is therefore usually advisable that payments on vehicles should be current at the time a Chapter 7 bankruptcy is filed.  

Will filing bankruptcy stop a wage garnishment?

Yes, in most instances filing bankruptcy will stop a wage garnishment.  The exception would be child support, some payments on tax debt which may only be delayed or temporarily halted by filing bankruptcy or orders of restitution.    

I have been sued by a creditor, can I still file bankruptcy on that debt?

Yes, when a creditor files a lawsuit this is simply a step in the debt collection process.  Debts in court or even debts that have already gone to judgment can be resolved/eliminated through bankruptcy.