Understanding the Difference Between Chapter 7 and Chapter 13 Bankruptcy in Layman’s Terms

If you are in some sort of financial distress, and unable to pay your debts, there is a good chance bankruptcy could be the best possible remedy available to you. Unfortunately, most people harbor a negative stigma regarding bankruptcy simply because they do not truly understand how it works.

Their ignorance is understandable, however, considering the complexity of the US bankruptcy code. The process of bankruptcy is oftentimes characterized by convoluted legalese, which is enough to scare off anyone who is unfamiliar with such verbiage.

In this blog, not only will we seek to define the differences between Chapter 7 and Chapter 13 bankruptcy for you, which are the two types of bankruptcy that individuals may be eligible for, we will seek to do so in understandable layman’s terms that we hope will be much more clear for the average person

Please keep in mind, there are numerous complicating factors that can occur that can affect one’s bankruptcy eligibility or the type of bankruptcy they will qualify for. Every situation is unique, and it is essential that you consult with an experienced bankruptcy professional like Bill Duncan of the law firm of Carolyn Moller Duncan, P.C. in order to figure out a bankruptcy plan that fits your specific circumstances. If you are unable to pay your debts and you believe bankruptcy could be right for you, please do not hesitate to give us a call today.

Firstly, we’ll take a look at Chapter 13 bankruptcy. Chapter 13 is also known as “wage-earner” or “reorganization” bankruptcy because you must have some sort of income in order to qualify, and the goal of the process will be to reorganize your debts in a manner which will allow you to keep all or most of your property.

In Chapter 13 bankruptcy, we will take a look at all of your debts to establish exactly how much total debt you owe. Next, we will calculate all of your income, whether it comes from employment, investments, an alimony agreement, or somewhere else. We will then subtract however much from your total income that the IRS says you need to be able to pay your necessary living expenses. Whatever amount is leftover will then be earmarked to pay off a portion of your debt through payments that will last for either three or five years.

At the end of that three or five year period, any debt that remains will be discharged, and you will move on with your life.

Chapter 7 bankruptcy, on the other hand, can involve liquidating (or selling off) your assets in order to discharge your debts. In Chapter 7, as in Chapter 13, we will analyze all of your debts in order to establish the total amount of debt you owe. However, rather than creating a payment plan that will last for years, some of your property may be sold to pay your debts, while debts for which no collateral was pledged, such as medical debts, will be erased. This will be a brief process that generally lasts between three and six months, after which you can quickly move on.

Most people would prefer to efficiently discharge their debts through Chapter 7 bankruptcy, but there are particular standards with regard to income that you must first qualify for in order to file for Chapter 7 bankruptcy. These qualifications are analyzed through the “means test,” which is meant to prevent high-income earners from filing for Chapter 7 bankruptcy benefits.

Remember, each type of bankruptcy, whether you file for Chapter 13 or Chapter 7 protection, will include unique benefits and drawbacks. It is important that you pursue the type of bankruptcy that is best suited to your specific needs and circumstances, so please contact the law office of Carolyn Moller Duncan today and let’s analyze your situation and make a plan together. Give us a call today.


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