Chapter 7 vs. Chapter 13 bankruptcy

September 12, 2012

If a consumer files for bankruptcy, most of the time she would file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  There are some major differences between the two, which I will summarize in this post.

 

First, it is important to understand the difference between secured and unsecured creditors.  An unsecured creditor is an individual or entity to whom the debtor owes money, and that creditor does not have any collateral supporting the loan.  Some common unsecured creditors are credit cards and medical bills.  A secured creditor, on the other hand, is an individual or entity to whom the debtor owes money, and there is collateral to support the loan.  The two most common types of secured creditors are mortgages and car loans.  With a mortgage, the creditor can take the debtor’s house if the debtor defaults.

 

In a Chapter 7, the consumer would generally not repay any of her unsecured creditors, and she would generally have a choice on what to do with regard to the secured creditors, either keeping the collateral and repaying the debt or surrendering the collateral to the creditor.  A Chapter 13 is known as a debt reorganization.  The debtor repays all of her creditors to a degree.  The unsecured creditors generally get repaid 10 to 30% over the course of five years.  The secured creditors get repaid in full, assuming that the debtor wants to keep the collateral.

 

Generally, a debtor would only file a Chapter 13 over a Chapter 7 if she does not qualify for the Chapter 7.  A debtor would be disqualified from filing a Chapter 7 for the following reasons:

  • She filed for a Chapter 7 too recently in the past,

  • She makes too much money, or

  • She has too many assets to protect.

 

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