Types of Bankruptcy

The most common forms of bankruptcy for individuals are Chapter 7, which involves liquidating assets to repay your debts, and Chapter 13, which reorganizes and creates a payment plan for your debts. The type of bankruptcy filing that is best for you is dependent on several factors, your outstanding debts, your assets, income, etc. Read more to find out about Chapter 7 and Chapter 13, as well as see our comparative chart below.

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Chapter 7 - Liquidation

Chapter 7 is a liquidation type bankruptcy, which means that certain assets can be sold to pay creditors.  Most cases do not involve losing any property to a bankruptcy Trustee. Chapter 7 is designed to wipe out (discharge) your obligation to pay certain debts such as credit cards and medical bills. Some debts, such as child support, alimony, student loans and traffic tickets cannot be discharged. However, once you have filed a Chapter 7 you should be protected from collection actions against you.

Depending on your exemption rights, i.e. which of your assets are exempt from being sold to cover your debts (cars and homes are commonly exempt) and secured creditors’ interests, i.e. the debt you owe, a Chapter 7 trustee is appointed to collect assets of the estate, reduce those assets to cash, and make distributions to creditors.

Statutory exemptions are generous, and in many Chapter 7 cases, there are no assets for the Chapter 7 trustee to administer. If requirements have been met, the Court will grant a discharge releasing liability on eligible dischargeable debts. The Chapter 7 process in most no-asset cases typically takes three to four months from filing to discharge.

7 Common Reasons to File Chapter 7

1. Debts are of a type that can be discharged through a Chapter 7, such as credit card debt and medical bills
2. To stop garnishment or other creditor collection action
3. Assets do not appear to be at risk of administration to Chapter 7 trustee
4. Already current on secured debts or able to promptly cure secured debt defaults, i.e. you are paying your mortgage and car payments
5. Income would not be sufficient to fund a Chapter 13 repayment plan
6. Chapter 13 debt limits exceeded
7. Quick access to a fresh start

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Chapter 13 - Reorganization

​Chapter 13 is designed for an individual or married persons with regular income to propose a monthly repayment plan over time. All of your debts are combined and you make one payment to the court appointed trustee who distributes payment to your creditors consistent with terms proposed in your repayment plan.

​Depending on the circumstances, a Chapter 13 plan may last three to five years. The person filing for Chapter 13 relief (usually with help from their attorney) proposes the terms of the Chapter 13 plan and sends monthly payments to the Chapter 13 trustee who administers the plan.

The Chapter 13 trustee typically starts disbursing payments to creditors once the Court confirms and approves the Chapter 13 plan. Once the terms of the plan have been completed, the Court will grant a discharge if one is available. During the course of the Chapter 13 while the automatic stay is in effect, creditors are stopped from pursuing lawsuits, garnishments, or other collection actions.

13 Common Reasons to File Chapter 13

1. To stop a pending foreclosure of real property
2. To end risk of repossession
3. To stop garnishment or other creditor collection action
4. To repay non-dischargeable Chapter 7 debt (i.e. support, restitution, criminal fines, taxes)
5. To preserve assets or non-exempt equity that would otherwise be at risk
6. Debtor has high income and a Chapter 7 filing would be regarded as substantial abuse
7. Chapter 7 relief is not available due to a prior Chapter 7 filing
8. Because lien stripping of a wholly unsecured mortgage may be an option
9. There is the potential to modify or bifurcate certain secured claims
10. A Chapter 13 discharge may discharge more than a Chapter 7
11. Because cosigned obligations are protected by co-debtor stay
12. To preserve the opportunity to file a future Chapter 7 bankruptcy if needed
13. To make an effort to repay creditors over time, usually three or five years

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Basic differences between Chapters 7 and 13

Issue	Chapter 7	Chapter 13
Purpose	​Liquidation or sale of nonexempt assets or claims to repay creditors	​Reorganization of debt, i.e. creating a voluntary repayment plan
Income/Asset Level	​Low – must pass means test	​Higher income may be required to file if ineligible for a 7, but anyone with regular income may file
Time to completion	​3-4 months	3-5 years
Impact on property	​Non-exempt assets can be sold by Trustee to pay creditors	​Debtor retains assets and the Trustee only administers voluntary payments from Debtor
Type of debt covered	​Unsecured debt such as medical and credit card bills, and secured debts where collateral surrendered	​All debts can be treated and provided for in a plan
Types of debt NOT covered	​Child support, alimony, certain taxes, student loans, & parking tickets.   Secured debts such as mortgage or car loans, if reaffirmed.	Some debts may not be dischargeable in Chapter 13, but all debts may be managed through a plan, such as criminal fines or student loans.
​Debts paid	By Trustee upon selling of liquidated non-exempt assets	​Monthly by Trustee to all creditors after receiving payment from Debtor
Co-signer protection	No	Possibly
​Debt Limits	N/A	​Secured of less than $1,184,200 and unsecured of less than $394,725
​Who may file?	​Individuals or Entities	Individuals
​Years on record	10 years	​Generally 7 years

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