There are two basic kinds of debt: secured and unsecured. Secured debt is a debt that has something attached to it as collateral. For instance, a car is connected to a car loan as collateral. A house is attached to a mortgage as collateral.
Unsecured debt, however, involves something without collateral. For instance, credit cards or personal loans are examples of unsecured debt.
To better comprehend how debt works, bankruptcy and its different forms must also be understood.
Personal Bankruptcy
Both chapter 7 and chapter 13 can be used for personal bankruptcy. Filing under chapter 7 for personal bankruptcy means that some or all debt accrued may be discharged, and assets may be liquidated to help pay off some of the money owed to the creditors.
A person’s means must be below the average in the state to file chapter 7 bankruptcy. The debtor must also receive credit counseling from an approved agency.
In contrast, filing under chapter 13 for bankruptcy does not entirely discharge all debts; instead, it reorganizes them into a more straightforward, payable method typically lasting about 3 – 5 years. Some people choose to file chapter 13 bankruptcy instead of chapter 7 so that they can remain in possession of their assets.
Usually, those filing chapter 7 do not own property or many expensive assets, and those filing chapter 13 are either business owners or property/asset owners.
Non-Dischargeable Debt in Bankruptcy
While chapter 7 and 13 sometimes offer the ability to discharge a debt, that is not always the case. Examples of debts that are non-dischargeable are taxes, student loans, and fines for law violations such as traffic tickets and liabilities for personal injury occurring from DWI. Also, family matters like alimony, child support, and divorce property settlements are non-dischargeable.
Debts occurring due to fraud, embezzlement, or intentional injury of another person or their property are non-dischargeable as well. If any of these apply, creditors may object to discharging a person’s debt. However, if a discharge is granted, creditors are no longer permitted to collect on it.
Chapter 7 and 13 Bankruptcy: Compared
While chapter 7 bankruptcy can lead to the discharging of debt, liquidating an asset is not always desirable. For instance, a small business that needs to get back on its feet would not want to file chapter 7 bankruptcy unless it had no choice because it would probably have to sell the property and what other assets it possessed. Chapter 13 bankruptcy, instead of liquidating, restructures the method of repayment of the debt, allowing the small business to repay its debt at a maintainable pace.
While chapter 7 can be completed over 3 – 5 months and chapter 13 can take around 3 – 5 years, the type of bankruptcy someone should file is heavily dependent on the individual or business’s circumstances and goals.
Chapter 7 bankruptcy allows debtors to make a quick rebound and discharge most of their debt. Whereas chapter 13 bankruptcy enables debtors to rebuild their credit score, keep their assets, property, cars, and the like, and slowly repay their non-dischargeable payments.
If you don’t know what kind of debt you are dealing with or which chapter to file bankruptcy under, contact the Law Office of R. Grace Rodriguez for a free consultation.