Money & Debt

The Basics

Both Chapter 13 and Chapter 7 bankruptcies stop creditors from collecting debts. The names come from the chapters of the bankruptcy law for each type of case. The best type for you depends on your income and what property you would like to keep.

A Chapter 7 bankruptcy discharges, many debts for low-income individuals, usually within 3-6 months. If a debt is discharged, you do not have to pay it, and the creditor can't try to collect it. It does not involve a repayment plan. Chapter 7 cannot save property at risk of loss due to missed payments, and it cannot eliminate debts like taxes, most student loans, and family support. However it can temporarily delay some losses like a foreclosure sale. If you have a certain amount of money and property, a court-appointed trustee sells your property and uses the money to pay off your debts. Bankruptcy exemptions allow you to keep some essential things, like a car, home, or clothing, but there are limits.

A Chapter 13 bankruptcy sets up a payment plan. You to repay as much debt as you can within three to five years. This allows you to keep most of your property. You must have regular, consistent income. A Chapter 13 can help repay past due taxes, child support, and property liens, like a house or a car loan. This can save a home from foreclosure or stop repossession of a car. Additionally, you can stop an eviction filing a Chapter 13 bankruptcy before receiving a 5-day notice as long as you repay the overdue rent through the plan.

Property & Exemptions

In Chapter 13 bankruptcy, you may keep all your property. Instead of a trustee selling your property to repay creditors, you make monthly payments to them. A creditor must receive the same amount of money in a Chapter 13 as they would in Chapter 7. In addition, you must also pay for liens against property you wish to keep.

Payment plan

In Chapter 13 bankruptcy, you must propose a payment plan to the court. Payments are made to the Chapter 13 trustee who charges a fee of about 10% of all funds collected and distributes the remaining money to the creditors. Payments made to the Chapter 13 trustee under the payment plan are used to pay off some or all the debts owed.

Before proposing a plan, you must demonstrate that you can cover your regular monthly living expenses, which include rent, food, clothing, utilities, and transportation. Your income type doesn't matter, but it must be regular and stable. You must have enough money left over to make payments on the proposed payment plan.

Sometimes you can't pay off all debts through the payment plan. If this happens, the balance left on the debt might be discharged. You can only get a discharge if you made your best effort to pay, however. Like a Chapter 7 bankruptcy, certain debts, like child support, taxes, and student loans are not dischargeable.

Liens, like home or car loans, on the property you wish to keep can't be discharged. They must be paid through the payment plan.

Time restrictions

A Chapter 13 bankruptcy lasts for 36-60 months (3-5 years), depending on your income. If your income is more than the state median income, the plan lasts for 5 years. If your income is below the state median income, it lasts for 3 years.

The Chapter 13 plan only ends early if all debts are paid off ahead of schedule.

Conditions for court approval

Your Chapter 13 plan requires making payments on time. This starts even before the court's approval of your payment plan. You'll need to pay the proposed amount to the trustee right away. Falling behind can lead the court not approving your plan and denying your discharge. If you fall behind on your plan payments or other payments, such as child support, the bankruptcy may be dismissed or possibly converted to a Chapter 7 bankruptcy.