Chapter 7 bankruptcy eliminates most of a person’s unsecured debt, i.e. debt that is not secured by property. Examples of unsecured debt include credit card and medical bills. Chapter 13 bankruptcy, on the other hand, does not eliminate debt but restructures it with a new monthly payment plan that is affordable. It can help prevent foreclosure or car repossession.
What is Chapter 7 bankruptcy?
Under Chapter 7 bankruptcy, all of the debtor's assets (except some exempt assets such as the primary residence) are sold and the proceeds are used to pay creditors. Creditors generally are not paid in full but the remaining debt is discharged (eliminated). The debtor has no liability for discharged debts and can get a "fresh start." Not all kinds of debt can be discharged and not everyone is eligible to file under chapter 7.
What is Chapter 13 bankruptcy?
In a chapter 13 bankruptcy (also called a wage earner's plan), the debtor restructures all outstanding debt by proposing a repayment plan with monthly installments for a period of 3 years (if the debtor's income is less than the state median) or 5 years. During this time, creditors cannot attempt debt collection. The debtor does not lose any assets; no property is sold to pay creditors.
The debtor must receive credit counseling from an approved credit counseling agency within 180 days before filing for bankruptcy. This is a requirement for all chapters of the Bankruptcy Code. If a debt management plan is developed during required credit counseling, it must be filed with the court.
Who is eligible for Chapter 7 bankruptcy?
A debtor can file for bankruptcy under chapter 7 irrespective of the amount of the debts or the debtor's solvency. However, there is a means test for filing under chapter 7. If the debtor's income and means — after subtracting living expenses and monthly payments for child support, secured debts like mortgage — are found to be sufficient to support a repayment plan under chapter 13, then the court usually will not approve relief under chapter 7.
Who is eligible for Chapter 13 bankruptcy?
Debtors (even if self-employed) are eligible for filing for bankruptcy under chapter 13 if their unsecured debts are less than $360,475 and secured debts are less than $1,081,400. Corporations and partnerships are not allowed to file under chapter 13.
Process of Bankruptcy
Filing the petition
With both Chapter 7 and Chapter 13 bankruptcy, the debtor must file a voluntary petition with the bankruptcy court. Some documents are also required to be submitted, such as:
- schedules of assets and liabilities;
- a schedule of current income and expenditures;
- a statement of financial affairs; and
- a schedule of executory contracts and unexpired leases
- a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling.
- a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case
- evidence of payment from employers, if any, received 60 days before filing;
- a statement of monthly net income and any anticipated increase in income or expenses after filing;
- a record of any interest the debtor has in federal or state qualified education or tuition accounts
The debtor must provide the following information:
- A list of all creditors and the amount and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
For a bankruptcy filing under chapter 13, additional documents include a proposed repayment plan for debts to be paid in 36-60 monthly payments.
Filing fees for a chapter 13 bankruptcy include a $235 case filing fee and a $46 miscellaneous administrative fee. Filing fee for a chapter 7 bankruptcy is $306, which includes a $245 case filing fee, a $46 miscellaneous administrative fee, and a $15 trustee surcharge. If the debtor's income is less than 150% of the poverty level, the court may waive this fee. In both cases, fees may be paid in installments.
Filing a bankruptcy petition automatically stays (stops) most collection actions against the debtor or the debtor's property. Chapter 13 also contains a special automatic stay provision that protects co-debtors. This includes any foreclosure proceedings. In both chapter 7 and chapter 13 filings, an impartial trustee is appointed by the court.
How Chapter 7 bankruptcy works
The trustee holds a meeting of creditors usually between 21 and 40 days after the petition is filed. The debtor must attend this meeting and answer questions under oath. The trustee and creditors may both ask questions regarding the debtor's financial affairs and property. The trustee is appointed by the court to administer the case and liquidate (sell) the debtor's nonexempt assets that are not under lien. Most chapter 7 bankruptcy filings do not involve any non-exempt assets that can be liquidated. For cases that do, creditors file a claim with the court and the trustee divides the proceeds from the sale of assets among the different creditors.
How Chapter 13 bankruptcy works
The trustee holds a meeting with creditors usually between 21 and 50 days after the petition is filed. Like chapter 7, the debtor is obligated to attend this meeting and answer questions under oath about his or her financial affairs. The goal of the meeting is for all creditors to agree to the proposed repayment plan either during or shortly after the meeting.
Impact on Credit History
A Chapter 7 bankruptcy stays on an individual’s credit report for 10 years from the fate of filing
A record of Chapter 13 bankruptcy stays on an individual’s credit report for up to 7 years. You may apply for new credit cards after 12-24 months, a new FHA mortgage loan 24 months after discharge, and a new Fannie Mae and Freddie Mac loan after 36 months.
Chapter 7 bankruptcy covers all unsecured debt, meaning that individuals can emerge from it with no debts except a mortgage, car payments, student loans and unpaid child support. Covered debts include credit cards, medical bills, payday loans, utility bills, some tax debt, and some personal loans.
Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
With Chapter 7 bankruptcy, the trustee does not receive payments, but you may continue to make payments for mortgages and car loans.
Chapter 13 bankruptcy involves payments to the trustee, beginning 30 days after the case is filed.
Risk to Personal Assets
Property can be lost during Chapter 7 bankruptcy, but most filers don’t, as bankruptcy allows individuals to keep necessities. If you have little, you will be able to keep most of it, unless property, such as a home or a car, was pledged as collateral for a loan.
Time and Cost
It typically only takes 3 to 6 months from the day you file with the court to your discharge with a Chapter 6 bankruptcy.
Chapter 13 repayment plans range from 36 to 60 months.
Other Ways to Void Unsecured Debts
Bankruptcy is not the only way to get debts discharged. This forum post has some great information on how to use provisions of the Fair Credit Reporting Act (FCRA) to get unsecured debts voided. Many of these techniques take advantage of the fact that evidence of the debt is often unavailable to the collection agency. When debt cannot be documented, FCRA mandates that it must be voided.
- Bankruptcy Basics - Chapter 7 (uscourts.gov)
- Bankruptcy Basics - Chapter 13 (uscourts.gov)
- Bankruptcy Resources
- Bankruptcy overview - Legal Information Institute (Cornell University)
- Wikipedia:Chapter 13, Title 11, United States Code
- Wikipedia:Chapter 7, Title 11, United States Code
- The Underworld of Debt Collection