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Difference between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Dec 7, 2021 | Uncategorized

If a consumer feels overwhelmed with debt, they may seek bankruptcy to get relief from certain debts. Most filers in Michigan and around the country choose Chapter 7 or Chapter 13, but these two types work differently.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is a liquidation process that requires the selling of nonexempt assets to pay debts. Nonexempt assets include things that the court doesn’t consider needed for daily living, such as vacation homes and jewelry. However, state or federal exemptions may help consumers save nonexempt assets based on equity.

Chapter 7 only removes some unsecured debts, or debts without collateral, such as credit cards. If the filer can’t pay a lender, they can relinquish the property, pay replacement value or work out an agreement.

After the debts are paid, the filer receives a discharge from the court, usually within four to six weeks. Consumers filing bankruptcy must pass a means test to determine if they have enough income to pay debts in Chapter 7.

Chapter 13 bankruptcy

Chapter 13 bankruptcy allows the filer to create their own payment plan for approval by the court. This allows the filer to include missed mortgage payments to avoid foreclosure as long as they stay current on payments. While they don’t have to sell assets, bankruptcy doesn’t remove liens, so lenders can seize property for nonpayment.

Otherwise, they must at least pay the creditor the value of the nonexempt property the creditors would get in Chapter 7. The filer commonly gets a discharge in three to five years, provided they have made all payments and followed the requirements.

Consumers benefit from bankruptcy with the automatic stay, which prevents foreclosure and collections temporarily. However, since bankruptcy can impact credit a few years, consumers should consider carefully whether bankruptcy is the right option for them.