If you are interested in getting financial relief by filing for personal bankruptcy, you're probably interested in learning about your rights and responsibilities as outlined in the United States Bankruptcy Code, which details the various types of bankruptcy protection.
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Chapter 7 Vs. Chapter 13 in the Bankruptcy Code
One of the major distinctions outlined in the U.S. Bankruptcy Code is the two most common types of personal bankruptcy, Chapter 7 and Chapter 13. Here's a summary of the differences between these two chapters.
- Repayment of debts: In Chapter 13 bankruptcy, filers are expected to repay a significant portion of their secured and unsecured debts in a three- to five-year repayment plan. In Chapter 7 bankruptcy, no such repayment is required; filers simply receive a discharge (that is forgiveness) of some or all of their unsecured debts.
- Keeping of assets: Chapter 13 bankruptcy allows filers to keep all of their personal assets (like cars, homes or valuable family heirlooms) while they make repayments. In Chapter 7 bankruptcy, though, any assets not exempted by state laws may be sold to cover part of a filer's debts.
- Length of case: Chapter 13 cases, as mentioned above, are much longer than Chapter 7 cases, generally lasting between three and five years. Chapter 7 cases move much more quickly, often finishing within six months.
- Requirements to file: Because of the differences in these two types of bankruptcy, they often work better for very different financial circumstances and have very different prerequisites filers must meet. In order to file under Chapter 7, filers must pass a means test, which essentially tests whether a filer would have enough income to make regular payments in a repayment plan. To file under Chapter 13, a filer must have a regular, dependable source of income.
- Automatic stay: In both Chapter 13 and Chapter 7, bankruptcy's automatic stay protects most filers from the collection actions of creditors. In most cases, as soon as your bankruptcy case has been filed (regardless of which chapter you choose), the automatic stay will protect you from collection actions including repossession, foreclosure, garnishment and lawsuits.
Bankruptcy Protection: Restructuring Vs. Discharge
The essential difference between Chapter 13 and Chapter 7 bankruptcy is this:
- Chapter 13 bankruptcy gives filers a chance to restructure their debts over the course of three to five years, while staying current on all debts that come due during that period. Chapter 13 bankruptcy tends to work well for those who have steady incomes, want to keep their possessions and want to get out of debt.
- Chapter 7 gives filers an opportunity to get rid of significant amounts of unsecured debt. The protection Chapter 7 offers tends to work well for filers who have little income and/or high expenses, significant unsecured debt and little or no assets.
Speak with a Lawyer to Discuss Your Bankruptcy Options
Because bankruptcy lawyers tend to be familiar with the U.S. Bankruptcy Code as well as with state bankruptcy laws, speaking with one is often a good first step if you're considering filing for bankruptcy protection.