7 Differences Between Chapter 7 And Chapter 13

08 May 7 Differences Between Chapter 7 And Chapter 13

Clients ask “What’s the difference between chapter 7 and chapter 13”? Sometimes, they call chapter 7 “straight bankruptcy” or just “bankruptcy”. Sometimes they call chapter 13 “wage earner plan” or “debt settlement plan” or “debt adjustment”. Here’s what the National Association of Consumer Bankruptcy Attorneys advises you in general.

Here are the most important features of chapter 7:

  • It’s fast – usually 3-4 months from start to finish.
  • If you make less than most people, you can file a chapter 7 case
  • If you make more most people, you can still file a chapter 7 case if you “pass the means test
  • You don’t have to make monthly payments to a trustee
  • You get to keep all your property which is exempt – exemptions vary from state to state.
  • You get to keep your property like your house and car as long as you keep paying any loans due
  • You have to give up any property which is not exempt – this can be a little or a lot depending on your particular case and state.

Here are the most important features of Chapter 13 bankruptcy:

  • People who make more than half the people usually have to file a chapter 13 case unless most of their debts were not for personal purposes
  • You have to make monthly payments based on a formula to a chapter 13 trustee for up to five years.
  • You can catch up on overdue secured debt. If you do, you can keep your house or car secured by that debt.
  • You can stop a foreclosure or repossession
  • You can get rid of a second mortgage on your house if the house is worth less than the first mortgage – this is called “lien stripping”
  • You can settle your debts over time – usually without payment of interest.
  • You can challenge your mortgage lender’s claim in the right sort of case.

Choosing one type of bankruptcy over another is difficult, which is why it’s always best to talk with someone who’s got a base of knowledge in the field. Making the wrong choice can spell disaster for your financial situation.

Image credit: Dee’lite/Flickr

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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