Chapter 7 v. Chapter 13
What is the difference between Chapter 7 & Chapter 13 – General Overview.
While the U. S. Bankruptcy Code has several chapters (types) of bankruptcies, there are generally only two types that are applicable to most people.
In a Chapter 7, most of your debts) are eliminated, giving you a fresh financial start. There are a few debts that are not eliminated such as student loans and some taxes. If you want to keep a secured item like a house or car, you cannot get them for free. Any money you owe on a house or car that you want to keep, you will have to pay that particular debt. The process used to maintain secured debts like these is called a Reaffirmation Agreement. In short, it is a long document that says you agree to pay the debt and in exchange you get to keep the house or the car. However, you need to know that a Reaffirmation is a legally binding process. If you are unable to make the payments after signing the Agreement, the creditor can repossess the collateral AND sue you for the difference. Therefore, care should be taken in deciding whether or not a item is truly essential to your fresh start before you sign a Reaffirmation Agreement.
In most cases, you are able to keep your assets in a Chapter 7. There is a list of specific categories of personal items you can keep, up to certain amounts, under Illinois state law. These allowed amounts will be the subject of a future post. Even though Illinois has some of the lowest exemptions levels, in most cases, they are enough to allow individuals to keep most, if not all, of their assets.
The length of a Chapter 7 case is usually only a few short months. Largely for this reason, Chapter 7 cases are far more common than Chapter 13 cases. Even with the high number of Chapter 13 cases I handle at my firm, Chapter 7 cases account for 60% to 70% of my caseload each year.
The basic principle of a Chapter 13 case is a repayment plan of a portion, but not all, of your debts. In some cases, $0 dollars will go to general unsecured creditors (i.e. credit cards, etc.) similar to a Chapter 7. For each individual, a unique payment plan will be developed where you will make payments to a bankruptcy trustee for 36 to 60 months. The actual length of your plan depends on the facts of your personal case. The trustee receives your payment and then distributes the payments according to the plan once it is approved by the court.
An advantage to Chapter 13 bankruptcy is that when you consolidate all your dischargeable debt into one manageable payment, so you will not be juggling all your different creditors and due dates. It is true that you will pay your mortgage, utilities, and other normal monthly living expenses, but all credit cards, medical bills, collection agencies, and sometimes even car payments, will be paid by the Trustee from the one payment you make every month. At the end of the plan, the balance owed to the general unsecured creditors (credit cards, medical etc.) will be eliminated just like in a Chapter 7. So in most cases, you will be debt free (except for a mortgage and some other limited items) upon completion of the Chapter 13. Generally, a Chapter 13 is not the first choice for most clients, but there are several reasons/situations that may require a Chapter 13 or even make it a better option. Please check back in with this blog as I will go into these reasons in a future post.