Chapter 7 vs. Chapter 13 Bankruptcy: What’s The Difference?

No one wants to have to declare bankruptcy, but sometimes it’s the only way to get a handle on financial problems. If a debtor has been declared unable to pay their debts by judicial process, they can go into bankruptcy. Insolvent debtors might have to allow the courts to administer their property for the benefit of their creditors.

Debtors who file by themselves go into voluntary bankruptcy. Federal bankruptcy law in the United States allows for several different types of protection. Each of these classes serve a different purpose.

Chapter 7 Liquidation

Chapter 7 consists of basic liquidation for both individuals and businesses. It’s the simples and fastest form of bankruptcy available. If the individual filing is a business, all business activities are ceased unless the trustee says otherwise.

People who file for chapter 7 bankruptcy get to keep some of their personal property, but most liens can survive the process too. Chapter 7 bankruptcy notes will stay on an individual’s credit report for ten years.

Chapter 13 Rehabilitation

Under chapter 13, debtors would have to devote some portion of their future income to repaying the creditors. This is done over a period of around three to five years under most situations. Secured creditors may be entitled to a larger payment than unsecured ones.

Chapter 13 relief is only available to individuals within certain income limits. Plans usually can’t exceed the five-year limitation. Debtors are usually allowed to keep most of their property under this system, such as their home, even if they don’t meet the necessary exemptions.

Other Bankruptcy Codes

For those who can’t file under chapters 7 or 13, several other programs also exist. Municipalities can declare bankruptcy under chapter 9, while chapter 11 is reserved for the reorganization of corporate structures. Municipal bankruptcies have been in the news recently as cities such as Stockton, California and San Bernardino, California. Agriculture and aquaculture ventures can work with chapter 12 if they fall on hard times.

Ancillary and international debts fall under chapter 15, which helps foreign debtors to clear out debts. Regardless of the mechanism used, it’s important to practice frugality to avoid falling into the same pitfalls again. Bankruptcy can be used as a learning experience.

Best Bankruptcy System

No one chapter is best. Chapter 13 bankruptcies aren’t available to everyone. Chapter 7 bankruptcies are usually the fastest. Competent legal advice can usually steer debtors towards which system they need to seek relief under. This can take a good deal of the heartache away.

This article was contributed by John Reynolds on behalf of a law firm that provides aggressive bankruptcy representation in Federal and State courts in New York and New Jersey and beyond.