Difference Between Chapter 7 and 13
An individual may file a chapter 7, 13 and 11. A chapter 7 is referred to as liquidation or getting a fresh start. A chapter 11 and 13 is referred to as reorganization. A chapter 11 is for an individual or corporation that owes a substantial amount of debt
Generally, Chapter 7
The debtor (person filing) must disclose on the bankruptcy petition, all assets and liabilities, including all debt and creditors. Immediately upon the filing of a chapter 7 and chapter 13 bankruptcy case, absolutely, no creditor may commence or proceed against the debtor for any reason, whatsoever. This means that upon the filing, no creditor can contact you for any reason, including, calling or sending letters of any kind.
Generally, an individual would consider filing for chapter 7 protection, if one is unable to pay their unsecured debt. Unsecured debt is any debt that is owed to a creditor, whereby the creditor does not maintain any interest in property, such as an auto, or real estate. Unsecured debt includes, but is not limited to the following: credit cards, personal loan, doctors’ bills, hospital bills, etc. If you meet the requirements under the bankruptcy code, you may keep your property ( ie., auto and house) and discharge (eliminate) all unsecured debt.
One may also consider chapter 7 protection for the purpose of surrendering (giving up) property, such as an auto or a house, due to an inability to make the finance or mortgage payments. Under this scenario, if the debtor meets the requirements, he/she may discharge (eliminate) the mortgage, auto financing and all unsecured debt.
If one meets the chapter 7 requirements, as of the date of the filing, all unsecured debt will eventually be discharged, without ever having to make another payment to the unsecured creditors. Generally, a debtor completes the bankruptcy process and obtains an order of discharge in approximately 4 months after the filing.
A chapter 7 does not require you to make any trustee payments like a chapter 13. A chapter 7 does not allow an individual to save a house from a foreclosure action or an auto from repossession.
The bankruptcy code specifies, which type of debt is dischargeable (eliminated). Even though you meet all of the requirements of a chapter 7 and obtain a discharge, the order of discharge does not discharge certain debts, some of which are as follows: 1. certain income taxes 2. child support, 3. student loans insured by the government, 4. debt incurred by fraud, and, 5. fines.
Generally, Chapter 13
Protects you from foreclosure and auto repossession
The debtor (person filing) must disclose on the bankruptcy petition, all assets and liabilities, including all debt and creditors. Immediately upon the filing of a chapter 7 and chapter 13 bankruptcy case, absolutely, no creditor may commence or proceed against the debtor for any reason, whatsoever. This means that upon the filing, no creditor can contact you for any reason, including, calling or sending letters of any kind.
Generally, an individual would consider filing for chapter 13 bankruptcy protection to save personal property (i.e. auto) that is in jeopardy of repossession, or a house that is in jeopardy of foreclosure.
Also, one may file a chapter 13, if an individual is unable to meet the requirements of a chapter 7 that will allow them to discharge all debt. Generally, under this scenario, a person would be required to pay only a portion of their debt to the creditors in a chapter 13 because they are unable to eliminate all debt in a chapter 7.
Furthermore, a debtor may file a chapter 13 for the purpose of paying off debt that is not dischargeable (eliminated) under a Chapter 7. The filing may provide a number of benefits (i.e. save house, eliminate debt, etc.).
Chapter 13 requires a debtor to make monthly payments to a trustee (person that administers case). The monthly bankruptcy trustee payments may last 36 to 60 months. The amount of the monthly payment and the number of months of the payments are based on factors including, but not limited to: the amount of arrears on your mortgage and/or auto finance payments; the value of your assets; amount of debt; income, and expenses before and after the filing. Each month, the trustee disburses your payments to certain creditors, in compliance with the plan.
Typically, if an individual is keeping their house, in addition to their monthly trustee payments, the person is also required to pay their monthly mortgage payments, directly to the mortgage company. If an individual is keeping a financed auto, he/she is required to continue paying the financing in some fashion. However, one is not required to pay any unsecured (i.e. credit card, personal debt) creditors directly to the creditor. If the court requires that you pay any portion of the unsecured debt, the payment will be made through the monthly trustee payment. Generally, upon completion of all payments, the debtor receives an order discharging (eliminating) all unsecured debt, whether or not the unsecured creditors were paid any funds. Even though a specific kind of debt is not dischargeable, you may eliminate the debt by paying the debt through the monthly bankruptcy plan payment.
If one’s house is in foreclosure, the chapter 13 stops the foreclosure action and allows the person to save the house by paying all arrears (payments behind), including fees and costs, through the monthly trustee payments, over the life of the payment plan. As explained, above, the monthly trustee payment may include payments to other creditors. At the completion of all trustee payments, the mortgage should be brought current.