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Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 vs. Chapter 13 Bankruptcy

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Making the Chapter 7 vs. Chapter 13 decision depends on the particular financial situation of the debtor, including the property he owns. In the majority of cases, Chapter 7 bankruptcy works best for debtors. National statistics show that about 70 percent of all individual debtors choose Chapter 7. However, it’s important for a debtor to take the time to rely on a bankruptcy attorney or other expert to confirm the winner of the Chapter 7 vs. Chapter 13 battle.

Why Choose Chapter 7 over Chapter 13?

  • Very little non-exempt property that could be seized by the bankruptcy trustee, liquidated and then distributed to creditors

  • Relatively low income
  • Little or no disposable income after monthly debts are paid

Why Choose a Chapter 13 Bankruptcy Instead of Chapter 7?

  • Back due payments owed on home or vehicle with imminent foreclosure proceedings looming.
  • Several pieces of valuable property that would not be protected by exemptions
  • Desire to protect a co-debtor on a debt. In Chapter 7, the debtor would receive a discharge on an unsecured debt entered into with a co-debtor. However, that debtor would not be protected against collection attempts by the creditor. In Chapter 13, the debt would be included in the repayment plan.
  • High income that would stop the debtor from qualifying for a Chapter 7 bankruptcy.
  • Desire to pay off at least some unsecured debt. In a successful Chapter 7 bankruptcy, virtually all unsecured debt is completely liquidated. In Chapter 13, the debtor pays all available disposable income, which is divided among creditors.

Why Chapter 7 vs. Chapter 13 Usually Ends up with a Chapter 7 Filing

In a competition between the two bankruptcy chapters, two factors make the Chapter 7 vs. Chapter 13 battle a no-brainer in many situations. Debtors facing bankruptcy are interested in getting out from under the supervision of bankruptcy court as soon as possible. In a Chapter 7 case, that can be as little as 4 to 5 months after the initial bankruptcy filing. In a Chapter 13 case, repayment plans cannot be shorter than 3 years, and most are 5 years long. During that time, a debtor’s budget, and expenditures are closely monitored by the bankruptcy trustee. The second factor is the ability to shed virtually all unsecured debt without losing any property. Not all Chapter 7 cases work out that way. But statistically speaking, 90 percent of all Chapter 7 cases involve no assets – meaning exemptions were found to cover all valuable property. Exemptions are not involved in Chapter 13 cases. Debtors are able to keep property facing foreclosure or seizure by including the back-due amounts in their Chapter 13 payment plans.

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