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Chapter 7 bankruptcy is a liquidation of the debtor’s assets and distribution of the proceeds to the creditors. In a Chapter 13 bankruptcy the debtor will keep his property if all of the payments of the approved plan are made. This is because the debtor will end up paying most of their debts to their creditors over time.
A Chapter 7 bankruptcy does not require that a repayment plan be filed with the Court. This type of plan is only required when filing a Chapter 13 bankruptcy.
Filing a Chapter 13 bankruptcy allows a debtor to make adjustments in their debt using their regular income. In doing so, the Court provides an individual with the opportunity to propose a financial plan that will reorganize his or her financial affairs. During the process of reorganization the debtor is under the protection of the Bankruptcy Court. Under a Chapter 13 filing, the Court has the power to approve a chapter 13 plan regardless of the position the creditors take so long as it meets statutory requirements. Typically, these plans are three to five years long with a statutory maximum of five years.
In Chapter 13 the debtor must pay some debts in full. These debts are referred to by the Court at “priority debts”. Good examples of priority debts are child support, alimony, and tax obligations.
Stated another way, the difference between a Chapter 7 and Chapter 13 is that the chapter 7 does not provide for a plan to reorganize. Rather it is a plan to discharge debts that are dischargeable and to liquidate non-exempt property. This is why Chapter 7 filings are often referred to as liquidation or straight bankruptcy. While Chapter 13 filings are often referred to as reorganization.
Debtors who are not current on their payments may be forced by the Court into a Chapter 7 or Chapter 11. Individual Chapter 11 filings are by a person as opposed to a corporation filing. In order to file a Chapter 11 a debtor must have unsecured debts in excess of $400,000 and secured debts in excess of $1,200,000. Otherwise, if they want to reorganize and pay their debts over time, they will likely file a Chapter 13 bankruptcy.
Disadvantages to filing any type of bankruptcy is that the record of such remains on their credit report for up to seven years. During such time, the debtor will have a difficult time acquiring credit, such as credit cards and mortgages. However, the advantages of filing bankruptcy include stopping foreclosure and the discharge of certain debts.