Bankruptcy 101: The Difference Between Chapter 7 and Chapter 13

Hundreds of thousands of Americans file for bankruptcy each year. But filing for bankruptcy does not mean that your debts are simply wiped away in one easy step. You must first be eligible to file a bankruptcy, and the duration and outcome of your bankruptcy case will depend on the type of bankruptcy filing for which you qualify.

And so this is where we will begin.

The two most common types of bankruptcy filings for consumers (as opposed to bankruptcies for businesses which work a little differently) are a Chapter 7 and a Chapter 13 bankruptcy. Under Chapter 7, consumers may have some of their assets sold, but are able to escape liability for most of their debts. The process usually takes just a few months. Under Chapter 13, consumers pay part or all of their debts under a tightly controlled budget plan overseen by a court-appointed bankruptcy trustee. The Chapter 13 process, also called reorganization bankruptcy, generally takes three to five years.

If you're considering filing for bankruptcy, your first step is to attend a credit counseling session run by a government-approved organization. Then you'll receive a certification confirming that you completed the course and then can file your case. During the session you'll be asked about your financial situation -- income, expenses, assets, debts and goals, and the counselor will help you figure out how to proceed.

If you make more than the median income for your state, you must complete a means test, which compares your monthly income and expenses to certain baseline costs set by a formula. If the means test shows that you have enough money left at the end of the month to pay at least part of your unsecured debts, such as credit cards, you must generally file under Chapter 13.

Many clients, at least initially, would prefer to file a Chapter 7 because they do not want to be in bankruptcy for years. That is understandable. However, there are some distinct advantages to a Chapter 13. First and foremost, Chapter 13 only requires you to pay back as much as you can afford.  It gives you a chance to stop any foreclosure proceedings, catch up on your mortgage payments, and possibly strip off unsecured second and third mortgages.

If you are considering a bankruptcy and have questions about how to proceed, please call our new associate attorney James Edmunds, at Garland Griffiths Knaupp, Attorneys, (503) 846-0707.

The help you need, and deserve, might be a telephone call away.