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The Difference Between Chapter 13 and Chapter 7 Bankruptcies

Updated on July 23, 2013

Chapter 7 and chapter 13 bankruptcies are judicial processes that serve to protect consumers and businesses from creditor’s action due to inability to pay debts. A chapter 7 bankruptcy is a complete discharge of all debt, chapter 13 is a reorganization of debt. Both processes require legal documents to be filed and court approval.

A private party or a small business that is not a corporation may file for a chapter 13 bankruptcy. A chapter 13 bankruptcy may be a good option for an individual who has regular income and has experienced a financial setback preventing financial obligations to be made as agreed but there is still regular income to pay debt. The chapter 13 trustee will determine how much the debtor can afford to pay and the debtor will make monthly payments to the trustee. The bankruptcy trustee has the authority to wave interest obligation in order to reduce payments. Interest on home mortgages or trust deeds cannot be reduced. This reorganization plan is structured for 3 to 5 years and can prevent home foreclosures and auto repossessions. There must be adequate monthly income to manage the reorganized debt.

A chapter 7 bankruptcy is liquidation and provides for a fresh start as opposed to reorganization. Debtors are allowed to keep their residences and automobiles. If there is a trust deed or mortgage obligation on a residence, it will continue after other obligations have been discharged. A chapter 7 may not be allowed if there is income and it is determined that the debtor would be able to manage the debt under a chapter 13 arrangement. Certain obligations such as child support, unpaid income taxes and student loan obligations cannot usually be discharged in chapter 7 bankruptcies.

Both the chapter 7 and the chapter 13 will provide relief from harassing creditors and give debtors breathing space in order to recover either by liquidating assets or restructuring debt to a manageable level. Legal obligations and benefits of bankruptcies can vary in different states. Any individual or small business experiencing enough financial distress that a bankruptcy is considered should consult an attorney. It is not required to have an attorney in order to file a bankruptcy but the services of a good bankruptcy attorney will liberate the debtor from the stresses of financial distress and allow a person to recover and pay their bills again.


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