What Are the Differences Between Chapter 7 and Chapter 13 Bankruptcies?

If you’re thinking about bankruptcy, you’re probably dealing with a lot of stress.  Having a working knowledge of what bankruptcy is and how it works will help reduce that stress, and here’s the most important thing you should know: there is nothing wrong with declaring bankruptcy.  Going bankrupt is a normal and expected part of financial life.  

Certainly, nobody wants to declare bankruptcy, but sometimes doing so is the best option to move forward.  It doesn’t mean you’re a failure or a bad person, it just means you are struggling to make ends meet.  So if you are in a position where you need to consider bankruptcy, remember this: if bankruptcy were wrong, the government wouldn’t offer it as a tool for resolving difficult financial problems.  Instead, the government offers not just one, but two different kinds of bankruptcy to assist individuals who are experiencing different kinds of challenges.

Liquidation Vs. Reorganization

The first kind of bankruptcy for individuals is available under Chapter 7 of Title 11 of the United States Code, which is why it is sometimes called Chapter 7 bankruptcy.  It is also known as “liquidation bankruptcy,” because that is essentially what happens: the court will oversee the selling off of all of the individual’s “non-exempt” assets, and then use the proceeds of the sale to pay his or her debts.  The good news, as explained below, is that in most cases people get to keep all of their property.  The other kind of bankruptcy is offered under Chapter 13 of Title 11, so it is known as Chapter 13 bankruptcy or “personal reorganization” bankruptcy.  In Chapter 13 bankruptcy, most of the debts will be repaid over a period of three to five years according to a court-approved repayment plan.  There is very little risk that any of your property would be sold as Chapter 13 is designed for you to keep your property.

Chapter 7 (liquidation) bankruptcy is more restrictive than Chapter 13 (reorganization) bankruptcy, in part because the result will be that nearly all of the individual’s debts will be erased afterwards.  For that reason, Chapter 7 bankruptcy is only available if you can meet certain requirements.  First of all, you can’t have filed for Chapter 7 bankruptcy within the past 8 years.  Additionally, you must have such a low level of income that you won’t be able to repay your debts according to a repayment plan under Chapter 13.  On the other hand, you can generally file for Chapter 13 bankruptcy as long as your debts are below the limits: less than $394,725 in debts not supported by collateral, and less than $1,184,200 in debts that are supported by collateral.

Qualifying For Bankruptcy

If you qualify for a Chapter 7 bankruptcy, you don’t need to worry that the court will sell everything you own and leave you in the street.  Only “nonexempt” assets will be liquidated, and if you’re filing in Georgia you are required to use Georgia’s set of exemptions.  This includes up to $21,500 in real property that you use as a residence, or up to $43,000 for married couples.  You can also keep up to $5,000 worth of vehicles, $500 of jewelry, and a variety of other items. It’s possible to have no nonexempt assets of value, and to be able to move through a Chapter 7 bankruptcy—wiping out most of your debts—without actually selling off anything.

If you’re considering filing for bankruptcy, you should have qualified legal counsel.  We offer free consultations to those considering bankruptcy, so call us to schedule yours today!