Understanding Chapter 7 and Chapter 13 bankruptcy differences

Debtors should understand the types of bankruptcy available. Chapter 7 and Chapter 13 are bankruptcy options that both have numerous benefits.

Despite a recent upturn in the economy, many people in Massachusetts and elsewhere are currently experiencing significant financial difficulties. Whether these challenges are a result of unemployment, credit card debt, medical bills or other issues, there are options that may help a person recover from a bad situation and begin repairing his or her credit. Two of these choices include Chapter 7 and Chapter 13 bankruptcy. It is important to understand the differences between both options, so the best choice possible can be made.

Chapter 7

Chapter 7 bankruptcy is often called the "clean slate" bankruptcy. This is because Chapter 7 allows debtors to completely discharge their debt, with some exceptions, such as federal student loans or child support obligations. According to the Administrative Offices of the U.S. Courts, Chapter 7 allows a person to receive a complete discharge of the following types of debt:

  • Vehicle or home loans
  • Credit card debt
  • Medical bills
  • Large loans for jewelry or furniture
  • Other types of secured debt

When a secured debt, such as a car loan, is discharged, this does not necessarily mean the debt has disappeared without consequence. For example, it is likely that the person's car will be taken and sold to repay as much of the debt as possible before the rest is discharged. Those who qualify for Chapter 7 bankruptcy may lose their home, real estate property and other assets they own to satisfy creditors.

Chapter 13

Chapter 13 bankruptcy differs from Chapter 7 in that debt is not discharged, but the debtor is allowed to pay back loans in a manageable repayment plan. According to the United States Bankruptcy Court, Chapter 13 can be a good option for those who do not qualify for Chapter 7 or for those who would rather hold onto their assets and pay back what they can. It is possible for many who qualify for Chapter 13 bankruptcy to keep their home and vehicles, as well as other assets. The repayment plan must be approved by creditors, and typically takes three to five years to complete. This type of bankruptcy is often ideal for those who have a steady income. However, if a person suffers a job loss or other unforeseeable complication while in the middle of a Chapter 13 repayment plan, he or she may then qualify to have debts discharged with Chapter 7.

Once an application for either type of bankruptcy is filed, creditors are required to immediately cease attempting to collect on debts. This can be a great source of relief for debtors and allow them time to regain some of their financial footing while working out the bankruptcy with the court. An experienced Salem bankruptcy attorney should be able to discuss which type of bankruptcy is the best option.