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The differences between Chapter 7 and Chapter 13

On Behalf of | Jun 6, 2022 | Uncategorized |

Massive debts could leave someone at a financial and mental breaking point. Repeated calls from creditors might fray at the nerves, and civil litigation may loom. Those realizing they cannot pay their obligations or even cover life’s necessities could explore options in a Virginia federal bankruptcy court. Chapter 7 and Chapter 13 bankruptcy filings are two such options. Would-be bankruptcy filers may wonder how these categories differ.

Chapter 7 and Chapter 13 bankruptcy

Chapter 7 is also known as liquidation bankruptcy, and the process involves liquidating non-exempt assets to pay certain debts. A significant number of assets are exempt, so anyone considering Chapter 7 should not assume everything they own faces liquidation orders. With Chapter 7, many debts face discharge orders from the court. That means the debtor has no obligation to pay those creditors.

Chapter 13 bankruptcy involves setting up a three or five-year payment plan to pay particular debts. As with Chapter 7, some debts face discharge, although the discharge often involves pro-rating the amount. Other debts are not reduced or eliminated at all.

Other aspects of Chapter 7 and Chapter 13 bankruptcy

Both bankruptcy chapters provide protections against creditor harassment. Once the court approves bankruptcy proceedings, collection actions cease. Collection actions will resume if the filer loses their bankruptcy protections, which would be the case if the filer did not make the required Chapter 13 payments.

Entering into Chapter 7 bankruptcy comes with a means test requirement. The test involves looking at the debtor’s debts and expenses, along with income from the past six months, to see if they qualify. If not, the debtor could file for Chapter 13. Another option involves waiting six more months and performing another Chapter 7 means test.