Miami Bankruptcy Law: Chapter 7 versus Chapter 13

Many people use the term “bankruptcy” as if it has only one form, but in reality there are four different types of bankruptcy: Chapter 7, Chapter 11, Chapter 12, and Chapter 13. The names come from the chapters in the United States Bankruptcy Code in which each bankruptcy type appears. Individuals are most likely to utilize either Chapter 7 or Chapter 13 bankruptcy. It’s important to understand the differences between these forms of bankruptcy, so in this blog entry we’re going to cover the basics:

Chapter 7 is probably the form of bankruptcy that most people think of when they hear the term “bankruptcy”. It’s the most common type of bankruptcy, and it’s also often the quickest.

In a Chapter 7 bankruptcy most of your property must be turned over to a bankruptcy trustee. The trustee sells the property and the proceeds are used to pay off your debts. In actuality, the proceeds of the property sale are usually insufficient to pay off debts and they may barely cover the costs of the proceedings. You, however, have no obligation after a Chapter 7 bankruptcy to pay the remaining debts that were discharged as part of the bankruptcy. Usually you can keep your home and car in a Chapter 7 bankruptcy, though it’s necessary to keep making payments on them.

Chapter 7 has the advantage of discharging most of your debts, but if it is determined that you have enough income to pay back your debts, you won’t be allowed to file a Chapter 7 bankruptcy. (You’ll need to file for Chapter 13 bankruptcy instead, which we’ll discuss shortly.) You’re also not allowed to file for a Chapter 7 bankruptcy if you’ve successfully filed for a Chapter 7 bankruptcy within the past eight years or a Chapter 13 bankruptcy within the last six years.

In a Chapter 13 bankruptcy, you agree to pay your debts within a timeframe ranging from three to five years. The court must approve the proposed payment plan. Once the court has approved the plan, debts may be paid in accordance with the plan, even if the creditors don’t agree to the plan. As long as you are making the agreed-upon payments, you do not need to lose any property.

Overall, Chapter 7 bankruptcy is usually more appealing because it offers individuals the opportunity to “start fresh” and leave most of their debt behind. But many people won’t qualify for Chapter 7. For those individuals, Chapter 13 bankruptcy offers a “way out” of their financial difficulties, though they will still be required to make payments on their debt. Chapter 13 bankruptcy does provide debtors with the opportunity to retain their assets should they choose to do so.

As you can see, bankruptcy law is complex. And the stakes are high, as the decisions you make during the bankruptcy process have a significant impact on your financial future. If you’re contemplating bankruptcy, we can help. Our team will discuss your situation and help you determine the best course of action. Contact us today to learn more!