Individual debtor generally file under Chapter 7 or Chapter 13. Most debtors prefer Chapter 7 because it enables them to discharge most debts. However there is strict eligibility requirements for filing a Chapter 7 bankruptcy. The trustee will take over all non-exempt property and liquidate them to pay off the debts. Despite these limitations, Chapter 7 bankruptcy offers certain other advantages over a Chapter 13 bankruptcy.
Chapter 7 bankruptcy provides a fresh start to the debtor by eliminating the debts. The debtor will no longer be liable for those debts which have been discharged in a Chapter 7 bankruptcy. Certain debts and liens will however survive a Chapter 7 bankruptcy and these include:
- alimony, child support
- tax debts and liens
- court ordered payments
- mechanic’s lien
The debtor in a Chapter 7 bankruptcy keeps all future income and any property that he or she acquires after the filing. However certain properties acquired within 180 days of the filing will be considered as belonging to the bankruptcy estate. Such properties include proceeds of a life insurance policy, death benefits, property received as part of divorce and inherited property.
A debtor cannot file a Chapter 13 bankruptcy if his or her debts exceed a certain ceiling. However there is no such ceiling for Chapter 7.
Unlike a Chapter 13 debtor who has to make regular payments to the trustee, the Chapter 7 debtor need not make any such payments to anyone. The trustee will pay the creditors from the sale of the non-exempt assets.
The discharge in a Chapter 7 is quick. Generally the debtor receives a discharge within 90 days of filing whereas the debtor in a Chapter 13 bankruptcy will receive a discharge only after making all the payments under the payment plan which generally lasts for three years.
Limitations of a Chapter 13 bankruptcy
- Chapter 7 bankruptcy does not have any of the limitations of a Chapter 13 bankruptcy. Even a business can file a Chapter 7 bankruptcy. Only individual debtors can file a Chapter 13 bankruptcy.
- Chapter 13 requires the debt to repay the debts over the period of the repayment plan. To make the payments, the debtor must have a regular income. In a Chapter 7 bankruptcy however, the debtor does not have to make any payment to the creditors. The creditors are paid from the proceeds of the sale of the non-exempt assets.
- If the debtors secured and unsecured debts exceed a certain amount, he or she will be ineligible for filing a Chapter 13 bankruptcy. Chapter 7 bankruptcy does not have any such ceilings.