What is the difference between a Chapter 7 and a Chapter 13 bankruptcy?

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Sometimes you get into severe financial straits and have to rely on bankruptcy. When this unfortunate happenstance occurs, which form of bankruptcy do you choose? The two major forms of bankruptcy for consumers are Chapter 7 and Chapter 13. Each of these bankruptcy forms are designed to ease and remove debts from you, while at the same time paying off the bills as much as possible.

Chapter 7 Bankruptcy:

Chapter 7 bankruptcy involves the liquidation of your assets, with the exception of a few necessary exemptions, in order to pay off as many of your creditors as possible. In return, the court wipes away all of your debt, allowing you a fresh start.

When you file for Chapter 7 bankruptcy, the court appoints a trustee to your case. The trustee is in charge of distributing any non-exempt asset you have to creditors in order to pay off some of your debt. The trustee will look over your estate and notify creditors if you have any non-exempt assets. The creditors can then file a claim for some of the proceeds. In a Chapter 7 bankruptcy, those proceeds will be all that the creditors will get, and they will not be able to harass you further regarding your debt. Once the filing is complete, your debt is discharged and you are no longer liable for it.

When entering into Chapter 7 bankruptcy, there are two important things to remember. The first is exemptions. There are a lot of exemptions available in the state and federal laws. Work with your lawyer to determine which set of rules to use, and you should be able to keep a lot of your assets. The second thing to remember is that the debt discharge does not apply to debt accrued through fraud or other illegal methods. If you have debt acquired through fraud, you are still liable for that debt.

Chapter 13 Bankruptcy:

Chapter 13 bankruptcy involves working with the court and your attorney to develop a more lenient repayment plan. This repayment plan usually takes five years to complete, and helps pay back part of the debt. Once the five years is up, the rest of the debt is discharged and wiped away.

Like in Chapter 7 bankruptcy, the court appoints a trustee to your case when you file for Chapter 13. Within 30 to 45 days of filing for bankruptcy, you begin making your payments to the trustee, and the trustee then distributes the payments as necessary to your creditors. You will only need to deal with the trustee, and the creditors will not be able to harass you due to a court order.

If you file for Chapter 13, then it is your responsibility to continue paying according to the schedule. If you are unable to do that, the court will dismiss your case, and you will not have your debts discharged. Also, not all debts will be discharged at the end of the repayment plan. For example, you will still have to pay taxes owed.

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About the Author: Dustin Bower

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Dustin Bower is the founder and owner of Bower Law Office, PLLC, http://www.bowerlawoffice.com. Dustin has experience in a wide range of legal areas, including bankruptcy, child welfare and advocacy, administrative law, criminal law, unemployment law, corporate law, and business litigation. Dustin's most recent legal experience involved working with several large engineering and construction firms responsible for the 35W bridge redesign and construction. Dustin is also very active in the non-profit community. He currently volunteers through Minneapolis Achieve, a program that puts professionals in contact with at-risk inner city high school students.
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