Differences between Chapter 7 and Chapter 13

Even as the nation’s economy continues to rebound from the recession, many consumers in New Jersey still find themselves struggling to make ends meet. When mounds of debt simply become too much to keep up with, it may be time to consider filing for bankruptcy. However, before this is done, effort must be made to understand the two forms of consumer bankruptcy so that the correct one is selected.

360 Degrees of Financial Literacy explains that a Chapter 7 bankruptcy is commonly referred to as a liquidation bankruptcy. This name reflects the fact that assets can be liquidated in order to repay creditors. In general, it is secured debt that must be repaid. Mortgages or automobile loans are examples of secured debt. Unsecured debt is generally forgiven and eliminated via a Chapter 7 bankruptcy. The American Bar notes that child support payment, student loan debt and taxes cannot be incorporated into a Chapter 7 bankruptcy. This type of bankruptcy will remain on a debtor’s credit report for 10 years.

A Chapter 13 bankruptcy is often called a wage earner’s plan. With this form of bankruptcy, debtors agree to a structured repayment plan over three to five years. They make payments to a trustee every month. The trustee distributes the funds to creditors as per the plan. This type of bankruptcy will remain on a debtor’s credit report between seven and 10 years.

Homeowners wishing to retain the houses can do so with a Chapter 13 plan as long as they become and stay current on mortgage payments. For many people, this is a good way to avoid a foreclosure as the filing of a Chapter 13 does stop these proceedings. Filing a Chapter 7 may delay but will not avoid foreclosure.