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Different Bankruptcy Options: Chapter 7 and Chapter 13

Posted on in Bankruptcy

Although each bankruptcy case is unique, every filer must eventually decide which bankruptcy chapter is best for their particular situation. Chapter 7 and chapter 13 are the most popular forms, each offering different bankruptcy options. The American Bar provides a detailed comparison.

Chapter 7 bankruptcy is straight bankruptcy liquidation while chapter 13 bankruptcy involves a repayment plan. This article will explain the key differences between these chapters:

1. Basic Process

For both chapter 7 and chapter 13, credit counseling is mandatory within 180 days prior to filing bankruptcy.

Chapter 7 Process

In chapter 7 bankruptcy, the debtor needs to file a petition with the court. The court will then appoint a trustee to administer the bankruptcy. The debtor must surrender all non-exempt assets for liquidation. The court will split all funds from the liquidation between creditors.

Chapter 13 Process

The debtor will file a bankruptcy petition and a debt management plan with the court. The payment plan will provide payments during a three- to five-year period. The debtor can retain both dischargeable and not dischargeable assets, and a portion of his or her income will go to creditors.

2. Limitations

Chapter 7

A debtor must pass a means test to establish eligibility for chapter 7 bankruptcy. Debtors with an income greater than the state median income may not be eligible. If a debtor was discharged in chapter 7 bankruptcy within the past eight years, discharge will not be available.

Chapter 13

Chapter 13 bankruptcy is only for debtors who owe less than $307,675 in unsecured debt and less than $922,975 in secured debt.

3. Effect on Home

Chapter 7

Debtors must keep up their mortgage payments to preserve their home under homestead exemption if there is not substantial non-exempt equity.

Chapter 13

Debtors can retain their home if they complete the payment plan and there is not substantial non-exempt equity. Otherwise, homeowners may be able to keep their property under homestead exemption or marital ownership law.

Bankruptcy laws are complex, and debtors often make mistakes during the filing process. This is why it is so important to consult an attorney for guidance.

If you need a skilled Arlington Heights bankruptcy lawyer, contact Newland & Newland, LLP at 847-549-0000. Stephen and Gary Newland have 40 years of combined experience practicing law. The office of Newland & Newland, LLP is a nationally renowned firm whose lawyers often speak at bar association seminars.

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