Difference between 7 and 13 (Focusing on a Chapter 13)

In my last post, I told you how people sometimes come into my office and tell me they want to file a Chapter 7 bankruptcy, and how I sometimes have to waive my red flag of warning of impending doom and disaster if they don’t consider the ramifications of filing under Chapter 7. In this post, I’ll focus on some of the features of the Chapter 13 bankruptcy.

In a Chapter 13 bankruptcy, the basic approach is to reorganize or refinance one’s debts. The debtor typically proposes a Plan wherein he may pay certain debts with his available resources and cancel other debts by surrendering collateral. For the next 3 to 5 years, the debtor then dedicates his disposable to pay off as much debt as he can. Disposable income is the amount of income left over after paying for your living expenses. With a few exceptions, any remaining debt is then wiped out or discharged. The objective of the Chapter 13 bankruptcy is to give the debtor enough time to pay those debts that are important (like catching up on a mortgage, paying off a car, or catching up on child support) and discharge the rest.

Unlike a Chapter 7 bankruptcy, the Chapter 13 trustee does not seize or sell your assets. Instead, if you have non-exempt assets and wish to keep them, the value of those assets is calculated into your monthly payments so that the unsecured creditors receive the benefit of those assets. While you may pay money because of those non-exempt assets, you may still get to keep them.

Both bankruptcies seek to discharge those debts that the debtor cannot afford. The difference is largely on the source of the money used to pay these debts. Chapter 7 pays the debts by liquidating assets. Chapter 13 pays the debts with regular monthly payments by the debtor based on disposable income.