The Difference Between Chapter 7 and Chapter 13 Bankruptcy

  1. Chapter 13
  2. The Difference Between Chapter 7 and Chapter 13 Bankruptcy

If you are overwhelmed by debt and you can’t keep up on your loan payments, you may be considering filing for bankruptcy. There are two common types of bankruptcy that can help reduce or eliminate your debt: Chapter 7 and Chapter 13 bankruptcy.

Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, means selling off nonexempt property to pay off debts. Chapter 7 bankruptcy is usually a good idea for petitioners who have limited incomes and cannot pay back all or some of their debt. The Chapter 7 bankruptcy results in a discharge of all debt (with a few exceptions as some types of debt are not eligible for discharge).

Chapter 13 bankruptcy, often called the reorganization bankruptcy, does not require that property be sold to gain bankruptcy protection. Instead, the petitioner must complete a court-mandated repayment plan. Once the repayment plan is completed, with on-time payments made to creditors as agreed through the bankruptcy court over a pre-determined amount of time, remaining unsecured debts may be discharged.

How Long Does It Take to File?

Chapter 7 bankruptcy case may be filed in a matter of a few days provided you are well organized and can promptly give over he information your lawyer needs to thoroughly complete your court documents. Once filed, the large majority are completed in 3 -5 months.

Chapter 13 bankruptcy is completed when the last planned payment is made (usually 3-5 years).

What Happens to Your Property During Bankruptcy?

During a Chapter 7 bankruptcy, the bankruptcy trustee can sell any non-exempt property to pay creditors. With good planning with your lawyer you will know what to expect and strategies may be available to accommodate that possibility.

During a Chapter 13 bankruptcy, petitioners keep all their property but must pay their creditors an equal amount in value to their nonexempt assets during their payment plan.

Does Bankruptcy Allow Debtors to Remove Unsecured Junior Liens from Real Property through Lien Stripping?

If you have a second mortgage on your house sometimes a Chapter 13 will let you keep your house and get rid of the second and other junior mortgages. If the value of the property is less that the total of taxes and senior liens, then the junior liens may be wiped out without you paying for the debt and you get to keep the property! This can’t be done in Chapter 7. If you are interviewing a lawyer and (s)he has not explored this option then get a second opinion.

Does Bankruptcy Allow Debtors to Reduce the Principal Loan Balance on Secured Debts Through a Loan Cramdown?

In Chapter 13 under many conditions the borrower can pay the value of the property which is collateral for the loan and not the entire principle. in a car case, the Debtor gets title without paying the car loan in full. In addition, where the person had a high interest rate from the lender, it is common to reduce the interest rate on the account. This frequently results in a lower car payment, or many fewer months to pay off a car.

What are the Major Benefits of Filing Bankruptcy?

Chapter 7 bankruptcy allows debtors to receive a full discharge of most debts in a short amount of time for a fresh start.

Chapter 13 bankruptcy allows debtors to keep their property and catch up on missed mortgage payments, auto loan payments, and nondischargeable priority debt payments.

What Are the Negatives of Declaring Bankruptcy?

Chapter 7 bankruptcy allows the bankruptcy trustee to sell the nonexempt property and does not provide a way to catch up on missed payments to avoid repossession or foreclosure.

Chapter 13 bankruptcy requires debtors to make monthly payments to the bankruptcy trustee for three to five years, and debtors may be required to pay back a portion of their unsecured debts.

Do you have questions about filing bankruptcy, or about which type of bankruptcy would be most beneficial for you? The experienced Tennessee and Georgia bankruptcy attorneys at Kenneth C. Rannick P.C. can help. We help good people through bad times every day, and we can help you, too.

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