Bastarrika, Soto, Gonzalez & Somohano, L.L.P.

What is the difference between Chapter 7 and 13 bankruptcy?

Many people looking for a fresh financial start can be confused by the different types of bankruptcy available and the laws associated with each. New Jersey individuals typically file for either Chapter 7 or Chapter 13 bankruptcy. It is important for individuals to look carefully at the qualifications, benefits and drawbacks of each to decide which is right for them.

The main difference between Chapter 7 and Chapter 13 bankruptcy is what happens to the debts following the filing. Under Chapter 7, the unsecured debt would be discharged. Under Chapter 13, payments are still made on debts pursuant to a court-approved plan. There are certain conditions to each, and often the one that is chosen depends on a person's financial situation upon filing.

Under Chapter 7 bankruptcy, the debtor becomes insolvent by liquidating all assets. Applicable assets are sold and creditors are paid with the revenue from these sales, if any exists. After that occurs, the rest of the unsecured debt is discharged. Chapter 13, on the other hand, is typically selected by individuals who, while they do have some reliable income, do not have enough to pay off debt in the short term. This involves a filer creating a payment plan and proving that he or she is earning wages.

Chapter 13 bankruptcy remains on a person's credit report for seven years, while Chapter 7 is there for 10 years. Filing for bankruptcy is a serious decision that should be considered carefully first. Speaking to a New Jersey lawyer about legal processes and options is a good first step for those considering filing in the state.

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