Bankruptcy: Chapter 7 vs. Chapter 13

The COVID-19 pandemic has affected millions of Americans, leaving many everyday citizens unable to pay for basic necessities. When debts start becoming overwhelming, many people look towards bankruptcy in order to get some relief. While bankruptcy should be considered a last financial resort, it’s a very common and understandable way to expunge your debt from creditors’ records. If this is something you’re considering, you should learn the differences between the most common forms of bankruptcy—Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7, also known as “straight” or “liquidation” bankruptcy, is the most common form of bankruptcy for the average American. The entire process is fairly straightforward, takes between four to six months and involves just one trip to the courthouse. At the end of the process, all your unsecured debts will be cleared and you will be given a second chance to build your credit and finances.

When you visit the courthouse, you will be assigned a bankruptcy trustee. This individual will oversee the Chapter 7 filing process and will sell any non-exempt property in order to pay off creditors. Luckily, most property owned by individuals filing for Chapter 7 bankruptcy is considered exempt. Usually, non-exempt property includes second homes, collectible cars, or family heirlooms.

At the end of the filing process, the trustee will discharge all your debts, leaving you with a clean financial slate. Please note, there are some debts the survive the bankruptcy process includes student loans, child support and tax debts.

Chapter 13 Bankruptcy 

Chapter 13 bankruptcy is used by individuals who earn a significant income and want to protect their non-essential property. In these cases, the majority of debt is cleared, after the individual agrees to pay their creditors a discretionary income over the course of 3-5 years. This “repayment plan” prevents a trustee from selling or “liquidating” any of the individual’s non-exempt assets.

Ultimately, the court just needs proof that any disposable income is going towards unsecured debts (such as credit card or medical bills). In Chapter 13 bankruptcy, “disposable income” is defined as any income remaining after paying secured debts (such as child support, mortgage or car payments) and living expenses.

COVID-19 and Bankruptcy

According to the Coronavirus Aid, Relief and Economic Security (CARES) Act, any COVID-related benefits will not affect your bankruptcy filings. This includes any stimulus payments received from March 2020 to March 2021 and applies to both Chapter 7 and Chapter 13 bankruptcy. To find get help with your case, set up a consultation with a chapter 13 bankruptcy lawyer as soon as possible.