What is the Difference Between Chapter 7 and Chapter 13?
Although it may not seem like debtors have many options when their debts become too great to handle, debtors do have the ability to decide what type of bankruptcy for which they want to file. So long as an individual debtor qualifies for either, a debtor may choose to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy. There are important differences between these two types of bankruptcy, however, and understanding these differences is essential to making an informed choice that will bring the most benefits.
Chapter 7 Bankruptcy
A person must be below a certain income level in order to qualify to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy is sometimes referred to as “liquidation” bankruptcy because all of the debtor’s nonexempt property can be liquidated, sold, and the proceeds distributed between the debtor’s creditors. “Nonexempt” property includes any property other than property that the bankruptcy laws specifically indicate may be retained by the debtor (this would usually include second or third homes, extra vehicles, and other valuable property). Once the debtor turns over his or her nonexempt property, all dischargeable debts of the debtor are ordered discharged and the debtor is no longer obligated to pay them. The whole process can be completed in a matter of months.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is available to debtors who do not qualify for Chapter 7 bankruptcy or who simply wish to take advantage of it. In this type of bankruptcy, the debtor agrees to pay his or her “disposable income” as determined by a formula to the bankruptcy court trustee for a period of three to five years. The trustee then distributes this disposable income received to the debtor’s creditors. At the conclusion of the applicable period, the remaining dischargeable debts are then discharged and the debtor is not obligated to make any further payments. As mentioned, the time it takes to complete a Chapter 13 bankruptcy can be as long as five years.
What Bankruptcy Cannot Do
Not all debts are dischargeable in a bankruptcy proceeding (whether Chapter 7 or Chapter 13). Student loans cannot be discharged. In addition, tax debts, back child support, and restitution orders entered against the debtor as the result of his or her criminal conviction cannot be discharged in bankruptcy. These debts will remain enforceable even after the discharge order is entered.
Choosing the Right Type of Bankruptcy
If you qualify to file for either Chapter 7 or Chapter 13, your decision on which type of bankruptcy to choose may depend on whether you have any property you wish to keep. In a Chapter 13 proceeding, for instance, you may be able to keep your car and your home if you are behind on payments by “catching up” over the course of your plan. There may be other considerations relevant to your decision that should be discussed with an attorney.
Van Den Heuvel Law Office can assist you in determining whether bankruptcy is an appropriate solution for your debt problems, what type of bankruptcy is right for you, and filing for bankruptcy protection. Contact our office today by calling (616) 698-0000 or contact our office online.