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What is the difference between Chapter 7 and Chapter 13 bankruptcy?

Filing for bankruptcy is a big step to take in one’s financial life, and it is important to make sure one understands the alternatives, the implications, and the options before filing. For those who are unable to receive the degree of debt relief they need outside of bankruptcy and who are prepared for the impact of bankruptcy on their credit health, the next big question is: which form of bankruptcy is right for me?

For most debtors, there are two forms of personal bankruptcy available, depending on the financial status of the individual and the amounts and types of debt he or she carries. Chapter 7 bankruptcy, often referred to as “fresh start” bankruptcy, involves liquidation of a debtor’s assets and using the proceeds to pay off creditors. The process is relatively short, often taking not much more than six months before remaining debts are discharged. The timeline can vary, though, depending on the circumstances of the case. 

By contrast, Chapter 13 bankruptcy is a longer process than Chapter 7 bankruptcy. Often called a “debt earner’s” bankruptcy, Chapter 13 involves establishing a repayment plan based on the debtor’s income and paying off creditors over a period of three to five years. Chapter 13 bankruptcy does not involve liquidation of any assets, so it is the preferable option for those who have nonexempt assets they want to keep in bankruptcy.  

Both Chapter 7 and Chapter 13 bankruptcy have specific eligibility requirements that must be met in order to file. The eligibility requirements for Chapter 7 and Chapter 13 bankruptcy, as we’ll point out in our next post, are different but somewhat complementary.

Sources:

Uscourts.gov, Chapter 7—Bankruptcy Basics, Accessed September 9, 2016

Uscourts.gov, Chapter 13—Bankruptcy Basics, Accessed September 9, 2016

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