Chapter 7 vs Chapter 13
Though the names chapter7 and chapter 13 look like having been taken from a book, they become extremely important for a person who is passing through a very bad financial phase. When a person is debt ridden and cannot repay his loans, he can file for bankruptcy under either of the two chapters. Bankruptcy is a legal process that has been developed to help people and companies in getting rid of their debts or repaying them under the protection of the bankruptcy court. Bankruptcies are generally of two types, Liquidation and Reorganization. While clauses of chapter 7 are invoked when filling bankruptcy under liquidation, Chapter 13 is made use of in cases of reorganization.
Chapter 7
Bankruptcies filed under chapter 7 are also known as straight bankruptcies. This chapter is the preferred one for most of the people who file for bankruptcies. This involves liquidation of all the assets of the person and repaying the debts. The court decides how much money goes to which creditor. Some of the assets of a person filing for bankruptcy are exempt from liquidation. These include his car and home apart from some other assets. Liquidation takes place according to the laws of the state in which the person resides. It has not been easy to file for bankruptcy under chapter 7 ever since some changes were incorporated in 2005. Now if 25% or more of the debt can be repaid through liquidation of assets, the person is not eligible to file under chapter 7.
The filing fee for chapter 7 is $209, and the entire process lasts for 3 ½ months. During this period no fee is required to be paid to the court.
While filing for bankruptcy, a person has to furnish all the facts and information such as
- List of creditors with their claims
- Source and amount of debtor’s monthly income
- List of all the assets, including property details
- List of all the monthly expenditure
Chapter 13
As described earlier, bankruptcy filed under chapter 13 is known as reorganization. Here, you have to tell the court your plan as to how you propose to pay to your creditors. Here, some debts are paid in full; some are paid partly while some are wiped out entirely giving you some relief. Another relief that a person gets is a long time frame in which to repay the debts. Chapter 13 does not ask for liquidation of assets. The court decides your payment plan after hearing your appeal.
Any individual can file for bankruptcy under chapter 13 provided his unsecured debts are under $360,475 and secured loans are less than $1081400. The information required to be furnished to the courts is same as chapter 7. A court fee of $194 is applicable while filing for bankruptcy under chapter 13.
It is easy to see that both chapter 7 and chapter 13 are intended to help a person facing a financial crisis. Both make it easier for the debtor as they allow him to breathe easy by way of making his burden lesser. However, the similarities end here, as there are some stark differences between the methodologies.
While a liquidation of assets of the debtor takes place under chapter 7 to facilitate repayment of debts, there is only reorganization under chapter 13 and debtor’s assets are saved.
Bankruptcies filed under chapter 7 are over within 3 ½ months while the debtor gets a longer period running into years to pay back his debts under chapter 13.
Bankruptcy is a very serious issue, and one should weigh all his options before filing for it in the courts.
In conclusion, it can be said that with recent changes in laws, it has become difficult to file for bankruptcy under chapter 7, and it is better for a reorganization of your debts to avoid any hassles while filing for bankruptcy.