Chapter 7 vs. Chapter 13

When it comes to bankruptcy, there are a few different options depending on the individual, business or situation. One of the more absolute forms of bankruptcy is the Chapter 7 option while Chapter 13 is generally designated for people with some form of income. Speaking with a bankruptcy attorney will allow you to better understand the difference between chapter 7 and 13 bankruptcy. This brief primer will give you a basic understanding as well.

Chapter 7 Bankruptcy Uses

For people who have large amounts of unsecured debt, or debts they simply cannot pay back, chapter 7 bankruptcy is usually preferred. Chapter 7, also known as “liquidation”, will completely remove unsecured debts. Unsecured debts include credit card debts, personal loans, judgments, and medical bills. A Chapter 7, unlike a Chapter 13, is a quick process, is completed in as little as 3-4 months, and generally does not include the debtor making payments to creditors (unless a debt is reaffirmed). Chapter 7 is often the easiest way of dealing with unsecured debts, but there are several items to consider:

Chapter 7 bankruptcy is often for people who have little or no income (there are a few exceptions where a chapter 7 bankruptcy can be filed regardless of the historical income of the debtor). To qualify for chapter 7 bankruptcy, you must not have excess or disposable income according to the means test (see this article for more information about qualifying for chapter 7 bankruptcy). Additionally a chapter 7 requires that trustee be appointed to determine the debtor’s nonexempt assets and sell them for the creditors’ benefit (for more information about what property is subject to exemption see this article regarding New Mexico bankruptcy exemptions); in many situations a debtor will have no assets subject to liquidation. See an attorney if you are unsure if your property is subject to liquidation; a misunderstanding of exemptions applicable in your situation can have serious consequences.

Considering many low income families have few assets (if any) subject to liquidation, chapter 7 is typically considered a good option. Unsecured creditors will rarely receive any compensation for the debts in such a situation. If you are curious to know whether you fit within this category, speak to a bankruptcy lawyer as soon as possible.

Chapter 13 Bankruptcy

If you are not in a low income bracket and have disposable income according to the means test then you must file for chapter 13 bankruptcy. Of course, only an expert bankruptcy attorney can help you to determine whether a chapter 13 is necessary, however it is a good option for those with ability pay back a portion of their debts. There are a couple advantages to a chapter 13 over chapter 7 such as lien stripping (like of a completely unsecured 2nd mortgage), cramdowns, and the super discharge.

Additional benefits of the chapter 13 bankruptcy over a chapter 7 include the ability to catch up on back due mortgage payments (arrears). The other advantage is that debtor will not have to sell any assets to repay creditors, but will need to create a repayment plan. Chapter 13 bankruptcy helps to repay creditors at a pace that is more suitable for a debtor (for a period of 5 years); and is a great way to repay debts that are not discharged in a chapter 7 (like nondischargeable tax debts). As always, if you have questions about the differences between chapter 7 and chapter 13 bankruptcy be sure to contact our law office for a free consultation; You will find that each has benefits, but the right choice will depend on your unique situation.