Differences between Chapter 7 and Chapter 13

Minnesota residents who are considering filing personal bankruptcy probably have heard of the two most common forms for individuals, Chapters 7 and 13. They may be unaware of what the differences are between the two, however, or what the result of choosing to file under either chapter might be.

Chapter 7 bankruptcy is also called a liquidation bankruptcy. In order to be eligible to file under Chapter 7, filers must first meet income guidelines through a process called means testing, as the chapter is meant for those whose income does not exceed certain amounts. When a person files a Chapter 7 bankruptcy, his or her non-exempt assets and property will be sold to pay back a portion of the debts owed. Many categories of property are exempted from the bankruptcy estate, however, meaning filers will be able to retain much of their property. An automatic stay will be issued and at the close of the estate, the remaining unsecured debts will in most cases be discharged. No further payments with respect to discharged obligations will be required.

Chapter 13 bankruptcy, in contrast, allows a debtor to keep his or her property and assets during the bankruptcy and after it. In a Chapter 13 filing, the debtor will enter into a repayment plan lasting between three and five years. If the debtor successfully completes the plan, the remaining unsecured debts will be discharged. This type of bankruptcy is good for people who need a longer time to catch up owed delinquencies, such as mortgage payments.

A Chapter 13 bankruptcy is designed to allow people to reorganize debt. Through this method, people may be able to stop foreclosure by having a longer time over which to stretch out catching up such delinquencies.

Source American Bar Association, "General Comparison of Chapter 7 and Chapter 13 Bankruptcy ", accessed on March 7, 2015

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