What are the differences between Chapter 7 and Chapter 13 bankruptcies?

Filing a bankruptcy is a very serious legal decision for anyone. The two types of personal bankruptcy focus primarily on different debt problems and the chapter that a client uses is based on their assets and liabilities, along with the objective of the bankruptcy filing. Chapter 7 is aimed primarily at discharging unsecured debt, while Chapter 13 can be crafted into a debt repayment and restructuring plan that consolidates all of the filer’s liabilities into one payment. All bankruptcy candidates are assessed according to a means test which determines, based upon income and family size, the type of bankruptcy a client can qualify.

Advantages of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is normally used when a client has little of no assets with significant liabilities or living expenses. There is no specific amount of debt needed to file, and most debts are discharged (eliminated) within months. A trustee may take an inventory of your personal assets and order certain assets sold so the proceeds can be transferred to your listed creditors, but this can be avoided in most instances through the use of exemptions. The primary advantage of Chapter 7 is that most unsecured debt can be completely discharged. Some debts that cannot be discharged are student loans, domestic support obligations and some taxes.

Advantages of Chapter 13 Bankruptcy

The main advantage of filing Chapter 13 bankruptcy is that most personal assets can be kept and debts can be restructured in a five-year consolidation plan. Many times a Chapter 13 plan can protect a house, car or other secured asset.

Impact on Credit Ratings

A Chapter 7 bankruptcy filing will have a negative impact on a client’s credit rating, however that impact lessens over time. Debtors are restricted from filing another Chapter 7 for eight years. Many individuals filing Chapter 7 bankruptcy are primarily interested in keeping some level of credit for essential items such as a house or a car. The trade line on a Chapter 7 will state ” Chapter 7, debt discharged”. In a Chapter 13 filing, the whole purpose and final outcome of completing the payoff plan can lessen the negative effect on a client’s credit rating. The trade line on a client’s credit report in a completed Chapter 13 should read “Chapter 13 wage earner plan, discharge”.