What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
Provided by HG.org
When preparing to file for bankruptcy, there are often many things on your mind. How will this affect my credit? Will I be able to pay for this? What will I lose? What will I gain? But one question that many people do not even know to ask is “what is the difference between a Chapter 7 and a Chapter 13 bankruptcy?” The answer can have profound repercussions on your case.
In Chapter 7 bankruptcy, you are asking the bankruptcy court to discharge most or all of your debts, and in exchange you are agreeing to allow a bankruptcy trustee to take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. You select property you are eligible to keep from a list of state exemptions. Although state exemption laws differ, states typically allow you to keep these types of property in a Chapter 7 bankruptcy:
1. Equity in your home (also known as the homestead exemption). Some states have no homestead exemption; others allow debtors to protect all or most of the equity in their home. For more information, contact a bankruptcy attorney in your jurisdiction.
2. Insurance. You usually get to keep the cash value of your policies. You may also retain benefits from employer provided insurance plans.
3. Retirement plans. Most retirement benefits are specifically protected from bankruptcy, which is part of the reason these investments are so valuable. Your bankruptcy attorney and financial planner should be able to identify any retirement plans that are not exempted from bankruptcy.
4. Personal property. You will usually be able to keep most household goods, furniture, furnishings, clothing (other than furs), appliances, books and musical instruments. You may be able to keep jewelry under a total of about $1,000 or so.
5. Car. Most states let you keep a vehicle as long as your equity in the vehicle does not exceed several thousand dollars.
6. Public benefits. All public benefits, such as welfare, Social Security, and unemployment insurance, are fully protected.
7. Tools used on your job. If you work a trade or profession that utilizes some kind of tools or unique instruments, you will probably be able to keep up to a few thousand dollars worth of the tools used in your trade or profession.
8. Other. Many states give a "wild card" amount of money -- often $1,000 or more -- that you can apply toward any property you wish to retain for whatever reason.
In Chapter 13 bankruptcy, on the other hand, you file a repayment plan with the bankruptcy court to pay back all or a portion of your debts over time. The amount you will ultimately have to repay depends on how much you earn, the amount and types of debt you owe, and how much property you own. In a Chapter 13, you do not forfeit any property like you would in a Chapter 7, because you fund your repayment plan through your income. Chapter 13 is more like a restructuring of your existing debts than a complete wiping-out of these obligations as in a Chapter 7.
Understanding the difference between a Chapter 7 and a Chapter 13 bankruptcy and knowing which one to choose can have very obvious implications for your assets and your future financial obligations. Of course, this article is something of a simplification, and knowing which option is right for you is something you will need to discuss with your bankruptcy attorney and your financial advisor.
Read more on this legal issueCommon Questions About Bankruptcy
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How Can I Get a Bankruptcy Exemption?
How Do I Declare Bankruptcy?
Car Repossession Laws
Chapter 13 Bankruptcy
What Not to Do Before Bankruptcy
Deciding between Chapter 7 and Chapter 13 Bankruptcy
What Does the Foreclosure Process Entail?
Bankruptcy Fraud: When is it Committed?
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.