The Difference Between a Chapter 7 and 13 Bankruptcy

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What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Most people who consider using bankruptcy as a debt resolution tool are confused as to the difference between a Chapter 7 and Chapter 13 bankruptcy.  Typical questions include:

While both programs share some similar aspects and outcomes, the two programs take different paths to get there.  Key variables that often dictate which Chapter is best for a particular individual are:

  • Income
  • Assets
  • Type of debt you are seeking to resolve
  • Long term objectives

Below is a comprehensive overview of the differences between a Chapter 7 and Chapter 13 bankruptcy.  However, the best way to understand your rights and the best course of action for your unique circumstances is to meet with a licensed Michigan bankruptcy attorney.  Acclaim Legal Services offers free consultations to help you explore your debt resolution options – risk free.  Call today at 866-261-8282 to speak to a licensed Michigan bankruptcy attorney or schedule an appointment online at any of our seven Michigan office locations in:  Detroit, Ann Arbor, Flint, Southfield, Dearborn, Lansing or Warren.

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Key Difference between a Chapter 7 vs. Chapter 13 Bankruptcy:  Complete Debt Elimination vs. Debt Consolidation

The main objective of both bankruptcy programs is to provide protection from creditors and debt resolution by obtaining a court order (known as a “discharge order”) eliminating the debt.  Although a Chapter 13 program is more commonly associated with repaying creditors, Chapter 13 Plans often involve debt elimination in addition to the repayment.  Under a Chapter 13 Plan, certain creditors and types of debt (such as a mortgage or property taxes) are repaid while other types of debt (unsecured debt such as credit card balances, medical bills, unsecured loans) may be eliminated with little or no repayment (based on demonstrating your income and assets are limited).

A Chapter 13 Plan’s primary focus is to pay mortgage debt (or rent obligation), vehicle loans, delinquent property taxes, and other secured debt obligations prior to paying credit cards, medical bills, consumer loans and other unsecured debts.  If there is very little income left after paying your mortgage or rent, car payment and monthly living expenses (food, clothing, utilities, etc.), then some or all of your general unsecured debt in the Chapter 13 Plan may be eliminated.

 A graphic of books on a book shelf

  • Chapter 7 bankruptcy is primarily a debt elimination program:  A Chapter 7 is designed to bring swift resolution to debt by eliminating general unsecured debts, such as:
    • Credit cards;
    • Medical bills;
    • Personal loans;
    • Loan deficiency debt following repossession or foreclosure
    • Judgments and garnishments;
    • Old utility bills, etc.

Chapter 7 eligibility is largely based on income limitations and demonstrating to the court that you do not have any disposable income after the payment of your fixed expenses.  If your income exceeds the allowable guidelines, a Chapter 13 can be proposed to pay only a portion of your debt with a feasible monthly payment based on your budget.  Further, Chapter 7 bankruptcy can involve the liquidation of your assets (real estate and personal property) if the value of your assets exceeds the amount the bankruptcy law allows you to protect.  If your assets exceed the allowable exemption, a Chapter 13 can be filed to allow a controlled, feasible repayment of a portion of your debt.

 

  • Chapter 13 bankruptcy is a debt consolidation program: The purpose of Chapter 13 Bankruptcy is to provide broader court protection to stop creditor actions, such as:
    • Home foreclosure;
    • Vehicle repossession;
    • IRS tax levies, etc;

Because filing Chapter 13 is a repayment process, personal property is protected and not subject to sale by a court-appointed Trustee.  The Chapter 13 Bankruptcy provides many unique debt reduction advantages over a Chapter 7 or other debt management programs, such as:

  • Removal of a second mortgage or home equity loan(s);
  • Reduce your car loan payment (through the reduction in the interest rate and in circumstances reduction in the principal balance);
  • Defer unsecured debt until secured debt is brought current:  repayment at 0% interest and you will likely eliminate a portion of the general unsecured debt with a court discharge at case completion.
  • Eliminate certain debts that cannot be eliminated in Chapter 7 (such as fines and penalties owed to a governmental unit (example: penalties related to overpayment of unemployment benefits)).

A family walking in the park.

Overview of Differences between a Chapter 7 and Chapter 13 Bankruptcy

 

CHAPTER 7

CHAPTER 13

Timeline

 Court discharge typically within 5 months. 36 – 60 Month Repayment Plan.

Who Qualifies

 Individuals with household income less than the applicable median income or that can demonstrate that they have little or no monthly disposable income. Anyone who has household income that can support the necessary repayment terms.

How Often You Can File or Refile

 Every 8 years.  Calculated by looking to the date the prior case was filed (not discharged). Anytime it may be necessary, even if a prior Chapter 7 filing exists within 8 years.  Eligibility for discharge will vary depending on prior discharges obtained.

Creditor Actions

 Court protection is enforced from the date of filing.  This will put an immediate stop to creditor calls and letters, judgments or garnishments, etc. However, a Chapter 7 does not eliminate secured debts (i.e. mortgage or vehicle) that may be delinquent and debtor is required to be current on the debt or return the collateral. Chapter 13 will also put an immediate end to creditor calls, lawsuits, judgments, garnishments, etc. However, a Chapter 13 provides broader court protection for the full repayment process to prevent creditor actions, such as:  foreclosure, vehicle repossession, judgments, garnishments, levies, etc.

Court Protection of Personal Property

 Chapter 7 allows you to eliminate unsecured debts and surrendered property with legal release of the debt.  Non-exempt property could be subject to sale by the court appointed Trustee. Any delinquent payments on personal property subject to a loan (such a vehicle) are subject to repossession by the creditor.  All other current secured property will likely require a reaffirmation agreement (re-signing a contract). All real estate and personal property is under court protection for the duration of the 36 – 60 month repayment process.  Any attempted creditor action requires court approval to lift any of these protections during the repayment process.

Impact on Credit Score

 Eliminates unsecured debt and therefore provides and immediate reduction in debt-to-income ratio.  Recent credit report data projects the majority of our Chapter 7 clients will experience an increase in their credit score within 12 months after filing. Promotes a balanced budget with focus on paying down principal debt. This reduces debt-to-income ratio and creates a positive payment history.  These 2 factors alone affect 65% of your credit score according to FICO.  Over 80% of our clients see an increase in their credit score during the repayment process after discharge.

Court Filing Fee & Attorney Fees

 Court filing fee:  $335.00.The attorney fees are determined based on each individual’s circumstances and can be paid in installments prior to case filing. Court filing fee:  $310.00.The attorney fees are governed by the Court.   In most cases, our firm accepts payment of the fees only through court-ordered repayment plan (vs. paying out-of-pocket fees up front, thus ensuring your attorney fees are paid from funds that would otherwise be payable to unsecured creditors, benefitting you).  In most cases, only the court filing fee is required to file the case and get the court protection in place.

Court Appearances

 One mandatory hearing:  341 First Meeting of Creditors.This is an informal hearing held by the court appointed Trustee. One mandatory hearing:  341 First Meeting of Creditors.There is a second hearing called the Confirmation Hearing.  Often, clients are not required to appear at this hearing.  At this hearing our proposed repayment plan is confirmed or approved by the court.

Credit Counseling Requirements

 Credit counseling has two parts and the cost ranges from:  $14 – $25.00.  The first portion of counseling, Pre-Filing Credit Counseling, is required to be completed at least one calendar day before the case is filed with the court.  The second half of the counseling requirement is called the Debtor Education Course and has to be completed before a discharge will be issued.  Failure to file either portion of credit counseling at the required time will lead to case dismissal. The same requirements exist for Chapter 13 as they do for Chapter 7 in this area.  The only difference is that clients have a longer period of time to complete the second half of counseling based on the length of their Chapter 13 plan.

Paperwork

 This is a broad overview of the initial and necessary paperwork that is filed with the court:

 

  • Bankruptcy Petition Cover Sheet;
  • Voluntary Petition;
  • Bankruptcy Schedules A – J;
  • Statement of Financial Affairs;
  • Individual Debtor’s Statement of Intention;
  • Compensation Statement of Attorney;
  • Creditor Matrix;
  • Means Test.

 

 The main difference for the required Chapter 13 bankruptcy paperwork the following document is NOT required for filing:

 

  • Individual Debtor’s Statement of Intention;

 

But additional paperwork does include the:

  • Chapter 13 Plan

 

 

Bankruptcy Attorney Michigan – Find Expert Help with Acclaim Legal Services

As is evident, there are a lot of factors that determine which type of bankruptcy, if either, is right for you.  At the free consultation we will:

  • Carefully review your current circumstances:  debt, income, delinquent bills, assets and real property, etc.;
  • Discuss your short and long term goals;
  • Provide a  comprehensive evaluation of your available options for debt resolution, including non-bankruptcy options such as debt settlement;
  • Discuss next steps and answer any questions you might have.

Making sure that you file the correct type of bankruptcy and have an experienced attorney in both Chapter 7 and Chapter 13 bankruptcy to guide you through the process is critical for resolving your debts and improving your credit.  With over 50 years of combined legal experience, we can offer you that proficiency combined with professionalism and compassion.  Call us today at 866-261-8282 to take the first step towards financial freedom.

 

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