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Differences between Chapter 7 and Chapter 13 bankruptcy


As many Texas residents know, the two most common methods of bankruptcy are Chapter 7 and Chapter 13. Filing for bankruptcy under either of these two chapters requires an in-depth understanding of bankruptcy laws.

The first difference is that while Chapter 7 involves the liquidation of assets, a Chapter 13 filing does not necessitate immediate asset liquidation. Instead, all debt is consolidated and an individual is expected to make monthly payments to repay his or her debt.

Another difference is that a debtor must pass a "means test" before filing for Chapter 7 bankruptcy and if that individual's income is more than the state's median income, a judge may not permit that person to file for bankruptcy under Chapter 7. On the other hand, any person whose unsecured debt is less than $307,675 and his or her secured debt is less than $922,975 can file for bankruptcy under Chapter 13.

When filing for a Chapter 7 bankruptcy, almost all debts are discharged and creditors receive their payments according to court orders. In the case of a Chapter 13 filing, all debts are repaid over a fixed time period, and ultimately, the debts are discharged. However, in both cases debts related to student loans, support obligations and taxes are not discharged.

In both Chapter 7 and Chapter 13, there are provisions to retain the individual's home, but according to the new bankruptcy laws of 2005, the homestead exemption has been limited to $125,000 if the home was purchased less than 40 months before filing for bankruptcy.

Another important personal asset is a vehicle. When filing a Chapter 7 bankruptcy a vehicle might be seized by the creditor unless the debtor can prove that the vehicle serves multiple purposes such as getting the person to work. In a Chapter 13 bankruptcy filing, the vehicle is usually safe, as long as the debtor continues to make timely payments or proves that the vehicle serves other purposes such as occupational needs.

A Chapter 7 bankruptcy does not have a repayment period because it involves the liquidation of assets to repay debts and obtain discharge, but a debt repayment plan under Chapter 13 is usually executed over a three-year, or sometimes a five-year, period. Finally, it is important to understand no matter the type of filing, bankruptcy remains on an individual's credit report for up to 10 years from the date of filing.

Source: AmericanBar.org, "General Comparison of Chapter 7 and Chapter 13 Bankruptcy," Accessed on Aug. 22, 2014

Source: AmericanBar.org, "General Comparison of Chapter 7 and Chapter 13 Bankruptcy," Accessed on Aug. 22, 2014

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