Chapter 7 Versus Chapter 13 Bankruptcy

The two most common forms of bankruptcy are Chapter 7 and Chapter 13. Chapter 7, also called "straight bankruptcy," arranges for complete liquidation of debt. In return the creditor has to surrender all his non-exempt assets via liquidation and subsequent distribution to the creditors. Chapter 13 bankruptcy also called "reorganisation,"allows the debtor to reorganise his debt structure over 3-5 years. To be eligible for Chapter 13, the creditor needs to demonstrate to the court that he has sufficient income to repay his debts. If approved he must submit a detailed payment plan.

Chapter 7 bankruptcy is generally most used for debtors who have few property assets, other than their household furniture and home necessities, and who have scant money remaining at the end of the month, or may even have trouble meeting basic expenses.

The advantages of Chapter 7 bankruptcy are that it provides for complete discharge of debts and the process moves rapidly. Once the debtor has filed with the courts, his creditors cannot collect the debt from him directly.

To qualify to file Chapter 7, a debtor needs to pass the means test, which determines is his entire income is under a certain specified amount.

Chapter 13 bankruptcy is applicable to debtors who have large amounts of equity, have a monthly income and other assets, but are incapable of keeping up with their monthly credit payments. Debtors accepted for a Chapter 13 bankruptcy agree to work out a 3-5 year plan (longer in the future), and will work with a credit counsellor to pay their debts. Monthly payments are sent to the "debt trustee," who apportions the money to creditors according to a prearranged dispersal plan. Payments in this type of bankruptcy are made from disposable income that remains after basic expenses are taken care of, food clothing, shelter, etc. To be eligible for Chapter 13 bankruptcy a debtor must have unsecured debts below $360,475 and secured debts are less than $1,081,400.

In both Chapter 7 and Chapter 13, the debtor must obtain mandatory credit counselling within 180 prior to filing bankruptcy with the courts. The counselling is designed to give debtors a chance to solve their financial problems themselves and with the help of the course counsellors, without the need to go to court. In addition, this course, as well as additional courses that people in bankruptcy must take, aim to teach people in debt how to manage their finances so they won't go into debt again after they come out of bankruptcy.