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Chapter 7 and Chapter 13 are the two types of personal bankruptcy in the US. Chapter 7 involves liquidating assets to pay off debts, while Chapter 13 involves repaying debts over three to five years. Chapter 13 is an option for those who pass the means test or want to keep their assets. Debts are repaid in order of priority, and some debts cannot be discharged. The downside is a long repayment period and court oversight of personal finances.
In the United States, individuals can qualify for one of two types of personal bankruptcy: Chapter 7 liquidation or Chapter 13 repayment. In a Chapter 7 bankruptcy, an official of the court, known as a bankruptcy trustee, liquidates the assets a debtor’s remaining balance and uses the proceeds to pay off some of their debts and then discharges the balance. In a Chapter 13 repayment plan, the debtor must repay all or part of his or her debts over a period of three to five years. The debtor and his attorney develop a payment plan that meets federal guidelines, and the trustee approves and oversees it. Debts are paid according to priority, and any remaining balance at the end of five years is discharged.
Chapter 13 bankruptcy is an option for two groups of people. The first are those who pass the federal means test, which determines whether a person has enough income to pay off their debts over time. The second group of debtors are those who want to keep their assets, such as a house or other valuable property. A Chapter 13 repayment plan allows them to keep their home and valuables while meeting the obligations of a structured repayment plan.
The downside of Chapter 13 repayment is that the repayment period is long, up to five years, and all of the debtor’s available income, other than court-allowed expenses, is applied to pay off the debt. During the repayment period, the debtor’s income is not yours and the debtor’s personal finances are subject to court approval. If his personal circumstances worsen, you may need to negotiate new bankruptcy terms to avoid having your Chapter 13 repayment plan thrown out and get back to where you started.
Debts are repaid in order of priority, taking precedence over obligations like child support, alimony, and back taxes. The next pay line is secured debt, like mortgages, and finally unsecured debt, like credit cards and medical bills. Some debts cannot be discharged in bankruptcy, such as child support, most student loans, and drunk driving lawsuit judgments. Although payments on these debts are made during the repayment period, they will not be canceled at the end of the bankruptcy. Finally, bankruptcy cannot be fully discharged at the end of the five-year repayment period until the debtor completes an educational course on money and debt management.
Smart Asset.
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