Virginia Bankruptcy FAQs
DIFFERENCES BETWEEN CH. 7 AND CH. 13 BANKRUPTCY
You may be wondering, what is the difference between a Chapter 7 and Chapter 13 bankruptcy? While they both have the name “bankruptcy,” they are very different. Chapter 7 bankruptcies are generally reserved for persons with lower annual income. The end goal of a Chapter 7 bankruptcy is to liquidate as much of the debtor's non-exempt property as possible, pay off the outstanding debt, and then discharge whatever debt remains, unpaid. However, as a practical matter, most property is exempt from the liquidation, and most Chapter 7 cases do not involve the sale of any assets. There are some debts that cannot be discharged, such as child support, most tax debts, student loans, or debts incurred through fraud. Once the court-appointed bankruptcy trustee determines if there is any non-exempt property to sell, and sells it to pay some debts, any remaining dischargeable debt will be legally discharged by the court.
In contrast, a Chapter 13 bankruptcy is reserved for higher income individuals where the debt is re-organized, and the debtor must pay back their debts (or a portion of them) over time. Typically, when one files for bankruptcy under Chapter 13, the filing debtor proposes a payment plan to pay off some or all of the outstanding debts over a term of 3-5 years. If approved, the debtor begins making payments to the bankruptcy trustee who then distributes the payments to the various creditors for the life of the payment plan. After that period, if the debtor sticks to the terms of the monthly payment plan, any the remaining dischargeable debt will be released. This is the preferred method if you have a large amount of nonexempt property you don't want to lose to a bankruptcy trustee in a Chapter 7 bankruptcy, or if you have more equity in a piece of property than you can protect with certain bankruptcy exemptions under Chapter 7.
It's important to know both types of bankruptcy because sometimes you may seek to file under Chapter 7, only for the trustee to have it converted into a Chapter 13, thus requiring you to continue to repay many of your outstanding debts. For example, if you file for Chapter 7 bankruptcy but are deemed to have too high an income or fail to meet the “means test” your bankruptcy may be unilaterally converted to a Chapter 13 by the bankruptcy court. Furthermore, you may first think it best to file for Chapter 7 bankruptcy only to realize that you have substantially more nonexempt assets than you first anticipated. Not wanting to lose these items you may yourself choose to convert to a Chapter 13 to save your belongings.