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What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

If you are simply unable to get out from under your debt, you may want to consider filing for bankruptcy protection. Bankruptcy has been around for hundreds of years in the United States and is designed to help people who are deep in debt by giving them a fresh financial start. However, bankruptcy protection comes in several different forms and choosing the type that best fits your needs is critical.

  • Chapter 7 Bankruptcy: This is often referred to as “liquidation bankruptcy” and requires the debtor to liquidate their assets, beyond certain exemptions, in order to repay creditors.
  • Chapter 11 Bankruptcy: This is “reorganization bankruptcy” and is generally used by businesses and individuals with a large amount of debt.
  • Chapter 12 Bankruptcy: This type of bankruptcy is only available for family farmers and fishermen.
  • Chapter 13 Bankruptcy: This is “debt adjustment bankruptcy” and is used to reorganize the debtor’s debt into a less burdensome repayment plan and develop a plan to repay all or part of the debt owed by the debtor.

For most people, filing for either Chapter 7 or Chapter 13 bankruptcy makes the most sense. However, everyone’s debts and financial needs are unique and it is always advisable to consult with a competent bankruptcy attorney in order to determine which type of bankruptcy you qualify for and which would be most beneficial for you.

Chapter 7 and Chapter 13 Eligibility

The first step in determining which type of bankruptcy is best for you is to assess whether or not you meet the eligibly requirements under each Chapter. UScourts.gov notes that under the eligibility requirements for Chapter 7, debtors must generally:

  • Be either an individual or a business entity,
  • Have received credit counseling within the last 180 days, and
  • Not have had a bankruptcy petition dismissed within the last 180 days because the debtor willfully failed to appear or comply with court orders, or voluntarily dismissed the case after their creditors sought relief from the bankruptcy court for secured property.

Additionally, UScourts.gov also outlines the eligibility requirement for filing Chapter 13 bankruptcy. In order to file under Chapter 13 the debtor generally must:

  • Be an individual,
  • Have unsecured debts that total less than $383,175 and secured debts that total less than $1,149,525,
  • Have received credit counseling within the last 180 days, and
  • Not have had a bankruptcy petition dismissed within the last 180 days because the debtor willfully failed to appear or comply with court orders, or voluntarily dismissed the case after their creditors sought relief from the bankruptcy court for secured property.

What Are Some Advantages and Disadvantages of Chapter 7 Bankruptcy?

Advantages:

  • After the court approves your Chapter 7 filing all of your eligible debts are instantly discharged,
  • As soon as you file for protection creditors must stop their collection efforts and garnishing your wages,
  • If you are at risk of losing your home to bankruptcy filing for Chapter 7 bankruptcy creates an automatic temporary stay,
  • Money that you earn after bankruptcy is yours, and
  • It generally doesn’t take very long to go through the bankruptcy process under Chapter 7 (debts are usually discharged within six months).

Disadvantages:

  • Your non-exempt assets will be sold,
  • If someone co-signed a loan with you that person can be stuck with your debt, and
  • You must wait eight years before being eligible to file for Chapter 7 bankruptcy a second time.

What Are Some Advantages and Disadvantages of Chapter 13 Bankruptcy?

Advantages:

  • If you can afford the bankruptcy plan that the court approves for you, you will be able to keep all of your property,
  • As soon as you file for protection creditors must stop their collection efforts and garnishing your wages,
  • Under Chapter 13 many different types of debt can be discharged,
  • Your home is safe from foreclosure as long as you keep current with your payment plan, and
  • You can file for Chapter 13 protection repeatedly.

Disadvantages:

  • Filing for Chapter 13 bankruptcy is complicated so your legal fees may be high,
  • Filing for Chapter 13 bankruptcy can stay on your credit report for up to 10 years, and
  • Your bankruptcy plan will remain in place for three to five years and therefore you will be involved with the bankruptcy court for multiple years.

Need Legal Advice?

If you are considering filing for bankruptcy in Southeast Iowa, contact the Noyes Law Office, P.C. today at (800) 875-7148 for a free consultation. Our experienced bankruptcy attorneys would be happy to sit down with you, discuss your financial situation, and explain the legal options available to you.

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