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What's the difference between chapter 7 and chapter 13 bankruptcy?

A Chapter 7 bankruptcy is often referred to as a liquidation bankruptcy. In Chapter 7 proceedings, you do not pay anything to unsecured creditors included in your bankruptcy petition unless the court requires a liquidation sale of your nonexempt assets. (Nonexempt assets are those not protected from forced liquidation by either federal or state statutes. For example, under the federal statutes each individual is allowed to exempt, among other things, $21,625 for real estate used as a primary residence, $3,450 for a vehicle, the right to state or federal benefits, and domestic support benefits (as of April 1, 2010). If you own assets that are nonexempt, you may be required to liquidate them. The court would then distribute the proceeds from the sale to your unsecured creditors as partial satisfaction of the debts you owe. Any remaining unpaid debt would then be discharged (with some exceptions), and you would no longer be held responsible for it. You can only file under Chapter 7 if you pass an income eligibility test. Otherwise, you must file under Chapter 13 for relief.

Often known as a "wage-earner's plan," a Chapter 13 bankruptcy does not require liquidation of nonexempt assets to satisfy your creditors. Instead, you pay some or all of your unsecured debt back through the court over a three- or five-year period. The percentage of unsecured debt you are required to repay must be at least equal to what your creditors would receive in a Chapter 7 bankruptcy. If you successfully complete the court-ordered repayment schedule, any unpaid unsecured debt is then discharged (with some exceptions).

If you wish to forestall and ultimately prevent foreclosure on real property (e.g., your home), you should seek to do so through Chapter 13. Although a Chapter 7 petition delays foreclosure, it does not prevent it without liquidation of the property to satisfy the mortgage debt. In Chapter 13, you may be given the opportunity to catch up in full on a mortgage arrearage as part of the court-approved repayment plan. If you do so, the foreclosure is prevented and the mortgage is brought up to date.