The differences between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Feb 16, 2022 | Bankruptcy

Bankruptcy in Austin, Texas is a legal way for consumers to remove unsecured debts. Consumers may choose several types of bankruptcy, but they often file Chapter 7 and Chapter 13. However, Chapter 7 and Chapter 13 have their own differences and benefits.

Chapter 7 bankruptcy

While Chapter 7 bankruptcy discharges unsecured debts in about four to six months, the filer must fulfill some requirements. One of these is that the individual must sell nonexempt property, or items the court doesn’t consider needed for daily living.

Nonexempt property commonly includes vacation homes, second vehicles, valuable collections, watercraft and jewelry valued over a certain amount. The trustee assigned to the case finds the property values, sells the items and divides funds among secured creditors.

A person must pass a means test to determine if he or she has enough disposable income left over to pay debts. The means test calculates disposable income by comparing income to the state median or deducting allowable expenses from the total income. If the filer fails both parts of the test, he or she can’t file Chapter 7, or he or she must file under the presumption of abuse.

Chapter 13 bankruptcy

Chapter 13 bankruptcy is a repayment plan that allows debtors to repay creditors over three to five years. The main difference between Chapter 7 and Chapter 13 bankruptcy is that the filer doesn’t have to sell any property.

If someone is behind on his or her payments, he or she can include it in the payment plan he or she submits to the court. However, the plan must treat all creditors equally, pay unsecured creditors at least the value of the asset and maintain current payments. Filing for bankruptcy doesn’t remove primary liens, but a filer may be able to strip a lien on a second mortgage.

One benefit of all kinds of bankruptcy is the automatic stay, which prohibits collections and foreclosure temporarily. While bankruptcy can help a consumer start fresh, it should be considered as a last resort.