How do Chapter 7 and 13 differ?

Understanding how Chapter 7 and Chapter 13 bankruptcies differ is important before deciding which option is best for you.

When faced with the prospect of a pile of bills and major debts that cannot be paid, Ohio residents understandably may feel stressed and concerned. For many people in this situation, active debt collection efforts can only increase the worries that people in this situation experience. A bankruptcy may well provide the relief that consumers need. However, before jumping into the decision to file bankruptcy, it is important to understand the two different types of plans available.

Liquidation and discharge in Chapter 7

The major difference between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy is the debt discharge model used. In both types of plans, debts are identified as either secured or unsecured.

Secured debts are those debts that have some type of collateral associated with them. Mortgages and auto loans are two of the most common types of these debts for consumers. Unsecured debts do not have any collateral associations. Examples of these debts are credit card debts or medical bills.

As explained by the U.S. Courts, in a Chapter 7 bankruptcy, unsecured debts may be discharged completely. For secured debts, people may have to surrender the collateral items associated with a debt for sale and repayment of the debt. This means consumers who opt for Chapter 7 bankruptcies may lose their homes or cars.

Structured repayment in Chapter 13

In a Chapter 13 bankruptcy, assets are not seized and sold to repay debts . Instead, a plan is developed that allows debtors the opportunity to repay debt over a period of 36 to 60 months. Bankrate explains that a consumer may repay as much as 80 percent of the original debt owed over the life of a Chapter 13 plan.

Payments are made on a monthly basis to a trustee who distributes funds to creditors based upon an agreement made at the outset of the bankruptcy.

Mortgages are not included in Chapter 13 plans but the bankruptcy stops collection activity by lenders. It also gives homeowners the time and opportunity to catch up on past payments and stay current going forward.

Choosing the right plan

When deciding which type of bankruptcy may be right, debtors in Ohio should always talk with an attorney. There are many subtleties to bankruptcy law as the Balance explains like exemptions that allow people to retain some assets up to a certain value. Getting the input of a professional will give people the best information with which to make a decision about their financial futures.

Frequently Asked Questions

  • I hear bankruptcy is a lot harder to file now. What is the difference?
    • Since Congress passed the new bankruptcy law in 2005, it is necessary to take two bankruptcy counseling courses. The first bankruptcy counseling course must be taken before you can file your bankruptcy petition, and the second bankruptcy counseling course must be taken before the court will issue the discharge order relieving you from your debt. Both bankruptcy counseling courses can be taken on-line for a small fee, and can be done in a few hours.

      There are also stricter requirements on who can get a total discharge of debts under a Chapter 7 bankruptcy. You must earn under a certain annual income for your area of residence, or you must be able to pass a means test provided for by the bankruptcy law. Under this means test, your income is matched against a formula for average monthly expenses in your area of residence to determine your monthly disposable income. Your debts are compared with your monthly disposable income to determine if you can afford to pay your debts. If you do not pass the means test, you may still get bankruptcy protection through a Chapter 13 bankruptcy where you pay some or all of your debts through a payment plan. While these restrictions limit some people, the bankruptcy attorneys at Bailey & Gunderson have found that the vast majority of people who need the protection of a bankruptcy are still able to take advantage of it.

  • Can I get all debts discharged through Bankruptcy?
    • Under Chapter 7 bankruptcy, you may get a total discharge of your debt. However, some of your debts may not be dischargeable. For instance, income taxes may not be discharged except where the debt is at least three years old, and you filed your income tax return timely. Student loans and child & spousal support obligations are also not dischargeable. Debts incurred through fraud are, likewise, not dischargeable. You may, however, apply to pay these debts through a Chapter 13 payment plan. The bankruptcy attorneys at Bailey & Gunderson can show you how.

  • What happens in a Chapter 13 bankruptcy plan?
    • In a Chapter 13 Bankruptcy plan, you typically pay your debts over a 3 to 5 year period. Each month, you make a payment amount (usually through a wage deduction order from your paycheck) which is then distributed by the bankruptcy trustee to your creditors. Secured debts, such an automobile loan, shall be paid through your Chapter 13 bankruptcy plan. Your non-secured debts will be paid from 1% to 100% of the total amount of your non-secured debt, and will be paid interest-free. The percentage of your non-secured debt that you must pay will initially be determined by the bankruptcy attorneys at Bailey & Gunderson. Once you have completed your Chapter 13 Bankruptcy plan, any remaining debts not paid through your Chapter 13 bankruptcy plan shall be discharged.

  • Will I lose my house, car or retirement savings by filing Bankruptcy?
    • The bankruptcy attorneys at Bailey & Gunderson will work with you to minimize the assets (if any) you may have to surrender when you file for bankruptcy. You are entitled to keep a certain amount of assets, which are "exempt", from seizure by creditors or the bankruptcy trustee. If the Chapter 7 bankruptcy exemptions do not provide enough protection, the bankruptcy attorneys at Bailey & Gunderson can develop a Chapter 13 bankruptcy plan that will preserve your assets.

      Working without an attorney, or with inexperienced counsel, may result in unpleasant surprises for you, as you may have to forfeit assets that you could have saved with better planning. The bankruptcy attorneys at Bailey & Gunderson can show you how.

      The attorneys at Bailey & Gunderson have filed over 1,000 bankruptcy cases. We offer a free initial consultation, and reasonable payment plans for our bankruptcy clients.

      Since 1995, the law firm of Bailey & Gunderson has assisted bankruptcy clients in the greater Cincinnati area (Hamilton, Clermont, Butler, Warren, and Brown Counties). If you have questions or need information about bankruptcy, please call our Cincinnati office at 866-540-8424, or email us.

  • Why Choose a Dissolution of Marriage?
    • A dissolution of marriage offers many advantages over a traditional divorce. The first consideration for many couples is that a dissolution of marriage is a much faster process than a contested divorce. Once your petition for dissolution of marriage has been filed, a hearing before a judge or magistrate shall occur within 30 to 45 days. A dissolution of marriage is usually much less expensive - both in terms of attorney fees and costs, as well as emotionally, because the spouses resolve the issues between them by agreement.

      It is a common misunderstanding that in a dissolution of marriage, the couple hires one attorney who works with them to resolve the issues and generate a separation agreement. In fact, an Ohio attorney can only represent one of the spouses. The family law attorneys at Bailey & Gunderson help to identify all of the issues which need to be addressed in your unique situation. Our firm will work with you to identify all of the assets and debts associated with the marriage, and to determine the most equitable and fair distribution of those assets and debts between the spouses. We also are committed to serving the best interests of your children. Some parents choose to have a shared parenting plan, which allocates the parental rights and responsibilities between the parents, including parenting time, child support, decision making, and payment of health insurance & expenses.

  • What Factors Does a Child Support Calculation Take Into Account?
    • Ohio child support law uses a formula to calculate child support. The law and the formula it establishes look at a number of factors in determining child support. These factors include:

      * The number of children involved

      * The gross annual income of both parents

      * The monthly child support obligations of either parent for other children

      * Existing spousal support obligations from previous marriages

      * Monthly day care, education and health care expenses

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