How Chapter 7 and 13 differ

People in Pennsylvania may find themselves struggling with high levels of debt for a variety of reasons. A job layoff, a divorce, an unexpected medical event that results in excessive out-of-pocket costs and more are just some of the factors that contribute to serious financial problems for many consumers today. When a person has exhausted their options for staying on top of their debt, they may want to evaluate bankruptcy. Before going too far down a path, it is important to know that there are two main forms of consumer bankruptcy and it is wise to understand a bit about both of them.

A Chapter 7 bankruptcy is the most common form of consumer bankruptcy plan. Called the liquidation plan, a person’s assets may be seized and used to repay debts to creditors. This type of plan is often able to be completed within a matter of months and all debts are discharged at the end.

A Chapter 13 bankruptcy, in contrast, lasts between 36 months and 60 months. It is called the wage earner’s plan as it requires a person to be able to afford monthly payments to a trustee. The monthly payments are used to repay some portion of the debt to each creditor. The trustee manages these distributions.

In a Chapter 13 bankruptcy, a consumer does not lose assets. For this reason, homeowners often seek Chapter 13 relief. However, a mortgage must be kept outside the bankruptcy plan. The Chapter 13 provides an automatic stay on foreclosure action and ideally gives people the chance to get current on their mortgage payments, thereby keeping their homes.