Filing bankruptcy can be an extremely taxing phase in the life of any business or for any individual. Chapter 7 & 13 are two vital programs that play a substantial role in debt elimination. A major difference between these two chapters is that Chapter 7 is specifically for individuals and business entities, while Chapter 13 is only for individuals, including sole proprietors.
Chapter 7 bankruptcy is commonly known as liquidation bankruptcy. Chapter 7 bankruptcy is for people with limited incomes who cannot pay back a chunk of or all their debt. Chapter 7 of Title 11 in the American bankruptcy code authorizes the process of asset liquidation. A bankruptcy trustee is appointed to liquidate non-exempt assets to pay off creditors; once the proceeds are exhausted, the remaining debt is finally discharged.
The eligibility requirements to file Chapter 7 are:
1) The debtor mustn’t have had Chapter 7 bankruptcy discharged in the preceding eight years
2) The applicant must pass a means test
3) Disposable income must be low enough to pass the Chapter 7 means test
Chapter 13 bankruptcy is commonly referred to as a reorganization bankruptcy. Your property won’t be sold when you file for Chapter 13 protection. Plus, if you complete a court-mandated repayment plan, you may be able to keep your property. After completing the repayment plan in which you pay your creditors a portion of the outstanding debt over a fixed period, any remaining unsecured debts, such as credit cards and medical bills, may be discharged. When debt is discharged, it means you are no longer required to pay it.
The eligibility requirements to file Chapter 13 are:
1) Cannot have more than $3,947,255 of unsecured debt or $1,184,200 of secured debt
2) Individuals only (Including sole proprietors)
Also, individual debtors who have regular income may seek to ascertain an adjustment of debts under chapter 13 of the Bankruptcy Code. A significant advantage under Chapter 13 is that it equips individual debtors with an opportunity to save their homes from foreclosure by giving them an opportunity to catch up on previous due payments through a long term plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer-oriented rather than business debts if the court finds that granting of relief would be an abuse of chapter 7. Chapter 7 bankruptcy is deleted 10 years from the filing date because there is no repayment of any of the debt. Chapter 13 bankruptcy is deleted seven years from the filing date because a portion of the debt is repaid under the discharge plan.
The major difference between the two programs is Chapter 7 typically needing three to five months to receive a discharge. This is different from Chapter 13 as the latter usually requires three to five years to discharge upon total completion of plan payments. Chapter 7 does not allow removing unsecured junior liens from the real property through lien stripping but Chapter 13 does if requirements are satisfied. Chapter 7 does not allow reducing the principal loan balance on secured debts through a loan cramdown whereas Chapter 13 necessitates it. To conclude, Chapter 7 allows debtors to quickly discharge most of their debt and get a fresh start. On a comparable note, Chapter 13 allows debtors to keep their property and follow up on the missed mortgage and nondischargeable priority debt payments!