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Chapter 7 and Chapter 13 – the differences

On Behalf of | Jan 4, 2023 | Bankruptcy, Chapter 13 Bankruptcy, Chapter 7 Bankruptcy

Debts may accumulate far beyond where a California resident can cover the balances. Upon exhausting all other options to deal with them, many will explore protections under federal bankruptcy laws. Personal bankruptcy could involve filing for Chapter 7 or Chapter 13. Both categories may assist persons overwhelmed with debt, even though there are stark differences between the two.

Chapter 7 vs. Chapter 13

Chapter 7 involves liquidating assets to pay creditors. That means debts that are not exempt are sold to cover obligations. The remaining debt could be subject to discharge, meaning the debtor no longer has to pay the obligations. Not all debt is eligible for discharge, such as alimony and certain taxes.

Would-be Chapter 7 filers must pass a means test that examines debts vs. income, among other factors. Those who cannot pass the means test could wait and file again or file for Chapter 13. Chapter 13 works differently since it involves proposing a payment plan to pay off a reduced amount of debt.

Chapter 13 obligations

Debtors must submit a payment plan proposal when filing for Chapter 13 bankruptcy. The court could reject the proposal, but the debtor can submit another one. Creditors may make statements about the proposed plan, but the court makes all final decisions regarding approval.

Some debt could be outright discharged in Chapter 13. Discharged debt would not be included in the payment plan.

Persons approved for Chapter 13 bankruptcy must make their payments timely. Those unable to do so should inform the Chapter 13 trustee to avoid any problems, including the bankruptcy’s dismissal.