What is the Difference Between Chapter 7 & Chapter 13?
Liquidation v. Reorganization
If you are just exploring the idea of bankruptcy, it can be overwhelming to know what bankruptcy would work for your situation. Chapter 7 is typically called a liquidation or a “fresh start” bankruptcy. Chapter 13 bankruptcy, on the other hand, is often referred to as a reorganization bankruptcy for individuals.
Both Chapter 7 and Chapter 13 bankruptcies will trigger the automatic stay protection. Once either one is filed, the protection stops creditors from calling or otherwise taking further collection actions.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is the most straightforward bankruptcy. If you “pass” the means tests and you do not have any protected (non-exempt) assets, your bankruptcy can be over start to finish in about 4-6 months.
Chapter 7 bankruptcies allow those with certain income and no assets to wipe most of their debts clean. A Chapter 7, similar to a Chapter 13 bankruptcy, will erase most unsecured debt. It will also stop a bank or a finance company from taking any further action to either foreclose on your house or your automobile. Unfortunately, a Chapter 7 cannot help individuals catch up on past due payments. A Chapter 7 is further limited on how it can help individuals with past due tax debts.
If you make over a certain income (it depends on income and household size), then you most likely won’t qualify for a Chapter 7 and will need to consider a Chapter 13 bankruptcy instead.
Chapter 13 Bankruptcy
Unlike Chapter 7, a Chapter 13 is a repayment plan that can last between 3-5 years. In addition, there are more tools available to individuals under Chapter 13. For example, if your house is being foreclosed upon, a Chapter 13 will stop the foreclosure and allow you to catch up on the past due amounts.
In addition, a Chapter 13 can stop automobile repossessions and allow individuals to catch up on the past due payments. In addition, a Chapter 13 bankruptcy can allow you pay on your vehicle only what the vehicle is worth. Many of our clients are underwater with their vehicles, or they owe more on the vehicle than the vehicle is worth. Depending on when the vehicle was purchased, we may be able reduce the amount to pay on the vehicle as well as the interest rate on the vehicle loan.
If you are above the median income for your size household in New Mexico or if you have assets, a Chapter 13 is likely the better option for you.
If you are interested learning more, you can enter your information in the Contact Us section or start your free case evaluation by submitting this form.