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The difference between Chapter 7 and Chapter 13 bankruptcy plans

| Aug 11, 2020 | Bankruptcy

Consumers seeking help to manage their debt may at some point come to consider filing for bankruptcy. However, before making the decision to apply for help under a bankruptcy plan, people should educate themselves about the different types of plans available.

The most common form of consumer bankruptcy is the Chapter 7 plan and the next most common form of consumer bankruptcy is the Chapter 13 plan. Both provide debt relief but in very different ways.

Chapter 7 bankruptcy plans

As explained by Credit Karma, a Chapter 7 bankruptcy plan discharges a consumer’s debt often in as little as a few months after the initial filing. No debt repayment occurs in this plan. However, a person’s assets may be repossessed should their value exceed the stated exemption level for the bankruptcy. For this reason, a Chapter 7 bankruptcy may be called a liquidation plan.

A consumer seeking debt relief via a Chapter 7 bankruptcy must meet qualification criteria via the means test. This test evaluates the person’s income and expenses to determine bankruptcy eligibility.

Chapter 13 bankruptcy plans

In contrast to the Chapter 7 plan, a Chapter 13 bankruptcy does not involve the loss of any assets. According to the U.S. Courts, a Chapter 13 plan consolidates a person’s debts into a form of structured repayment.

The consumer makes monthly payments to a trustee who, in turn, pays creditors per the plan. This continues for three to five years. Due to the need to make these payments, a Chapter 13 bankruptcy may be referred to as a wage earner’s plan. At the end of the term, any remaining debt is discharged.

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