The biggest difference between the two plans is the time to complete the case. Chapter 7 discharges are obtained in a matter of months. Chapter 13 discharges can take between 3 and 5 years.
Chapter 7 is designed as a liquidation. A trustee may sell certain property that you own at the time you file the bankruptcy case. The trustee uses the proceeds of the sale to pay creditors. In most chapter 7 cases this does not happen. Typically, you will not have any assets over and above what the law allows you to keep, this is your exempt property. In practice, you generally do not have any non-exempt property a trustee can sell.
Some debts are not discharged in a chapter 7 case and you must repay them. These include, but are not limited to, past-due child support, certain tax obligations and student loans. Secured debts, (commonly your house, car) also do not go away in a bankruptcy.
The bankruptcy case addresses only the debts you list at the time of the bankruptcy case. You must pay debts you incur after filing the bankruptcy case as usual. You may keep the money that you earn after filing a chapter 7 bankruptcy case, as well as most other property that you obtain after the filing.
Under chapter 13, you keep your property and you agree to pay your debts over time from your current income, pursuant to a court-approved plan. The amount that you will repay to creditors under the plan will vary based on your particular circumstances. In general, it is more a function of your ability to pay (as the court sees it) than the amount of your debt.
The payments made to creditors under the plan must total at least as much as creditors would have received if you filed a case under chapter 7. The payments are made to a trustee, who distributes the payments to the creditors.
Do I have to qualify for bankruptcy? How will I know if I am eligible?
On October 17, 2005, changes to the bankruptcy laws were made which changed the requirements for filing chapter 7. You have probably heard of the “means test” if you are considering bankruptcy.
The means test compares your excess monthly income to the amount of unsecured debt to determine how much you could repay to creditors if you were to file chapter 13. This calculation is hypothetical and in many cases does not reflect your true circumstances. In an effort to standardize the means test, debtors calculate this ability to pay based on charts provided by the I.R.S. Sometimes these charts work to your advantage, by overestimating your expenses compared to your actual expense. Sometimes it works against you, such as the case where your actual vehicle expenses exceed those allowed by the I.R.S. chart. Unfortunately, the means test is quite complicated. We can better explain your options during your initial consultation after considering your unique circumstances.
There are two principal requirements for eligibility in a chapter 13 case. First, you must have regular income, although this need not be from a job; regular benefit payments or rental income would qualify. Second, you must not have debts over a certain amount. The debt limits are $1,010,650 in secured debt (like home mortgages and auto loans), and $336,900 in unsecured debt (like most credit card debt). These numbers go up periodically.