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Chapter 7 Bankruptcy Compared to Chapter 13 – What’s the Difference?

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President George W. Bush. This was the “bankruptcy overhaul” bill that was long sought by lobbyists in the credit card and lending industries.  The changes made by this law make it more difficult for individuals to file a Chapter 7 bankruptcy and discharge their debts without making any payments. One of the main goals of this bill was to prevent abuse of the bankruptcy system and steer consumers that need debt relief away from Chapter 7 and towards a Chapter 13 filing. Despite many misconceptions, a Chapter 7 bankruptcy is still available for most consumers. Below are some of the differences between the two types of bankruptcy filings:

Chapter 7 Bankruptcy – In a Chapter 7 case, a debtor is released from most of his or her debts roughly four months after the case is filed. A Chapter 7 discharge will absolve a person of most debts, except for a list of about 20 categories of “non-dischargeable” debts which include student loans, child support, certain taxes and debts for fraudulent activities. Debtors seeking debt relief under Chapter 7 must pass a “means test” which attempts to assess whether the debtor would be abusing the bankruptcy system by filing for Chapter 7 rather than making payments in a case filed under Chapter 13.  The means test is essentially a comparison of a debtor’s household income against the median income of households of the same size in state in which the case is filed.  If a debtor does not pass the means test, he will be disqualified from obtaining a discharge under Chapter 7 and must file under Chapter 13.

Chapter 13 Bankruptcy – Under a Chapter 13 filing, the debtor agrees to make monthly payments to creditors under a court approved plan. In most cases, the amount paid back is only a small portion of the outstanding debt owed. When the court approved amount is paid, a discharge is entered and the debtor is no longer obligated to pay the remaining amount owed to his or her creditors.

It’s important to remember that each person’s financial situation is unique. There are many factors that will determine whether you should file under Chapter 7 or Chapter 13.

If you live in or around the Houston, Texas area and are struggling with debt, contact the Weber Law Firm today to discuss your options. We have experienced bankruptcy attorneys that will help you navigate through the entire process and get you on a debt-free path as soon as possible. We can be reached at 713-789-3300 and offer a free and private consultation.