The Short Answer
It depends on the person’s financial situation. Chapter 7 is generally a liquidation process in which nonexempt property may be administered by a trustee, while Chapter 13 generally uses a court-approved repayment plan for an individual with regular income. Neither chapter is automatically “better.”
What Is Chapter 7?
Chapter 7 is commonly described as liquidation bankruptcy. A trustee administers the bankruptcy estate, and nonexempt property may be sold for the benefit of creditors. Many consumer Chapter 7 cases are “no-asset” cases because no nonexempt property is available for distribution, but that cannot be assumed without reviewing the person’s assets and applicable exemptions.
What Is Chapter 13?
Chapter 13 is designed for individuals with regular income and generally involves a court-approved repayment plan lasting three to five years. The debtor typically keeps property while making plan payments, subject to the Bankruptcy Code and the terms of the confirmed plan.
How Does Income Affect the Analysis?
Income can matter in both chapters. Chapter 7 eligibility can involve the means test, while Chapter 13 plan length and payment requirements can be affected by income and other financial information. The calculations are technical and depend on current law and the debtor’s circumstances.
What About a House or Car?
It depends on equity, liens, payment status, exemptions and the chapter involved. Bankruptcy does not automatically erase a mortgage or vehicle lien, and a discharge of personal liability does not necessarily eliminate a valid lien on property.
Does Bankruptcy Eliminate Every Debt?
No. Some debts are not discharged, and some categories receive special treatment. Domestic-support obligations, certain taxes, many student loans and some other debts may survive or require additional legal analysis.
Which Chapter Is Right for Someone?
There is no universal answer. A person’s goals, income, assets, arrears, secured debts, prior bankruptcy history and the types of debts involved can all affect the analysis. Alternatives to bankruptcy may also be relevant.
Bottom Line
Chapter 7 and Chapter 13 use different structures and can produce different consequences. A qualified bankruptcy attorney can review the person’s complete financial picture, exemptions, liens, income and goals before any decision is made.
The firm can review income, debts, assets, liens, collection activity and other circumstances that may affect whether bankruptcy is an option.
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