Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy 

Although Chapter 7 and Chapter 13 bankruptcy have some similarities, such as the fact that they are designed to help individuals regain control of their finances through the relief granted under U.S. bankruptcy laws, they are also very different.  Any person considering filing for bankruptcy must choose the correct filing status in accordance with their situation and current disposable income. 

A Chapter 7 bankruptcy is commonly referred to as a ‘fresh start’ because it permanently, and legally, releases a debtor from most or all of their debts with the issuance of a discharge.  A Chapter 13 bankruptcy, on the other hand, is required for individuals who have enough disposable income, after paying the necessary living expenses, to repay creditors through a court-approved 3-5 year payment plan.   

When it comes to assets, many filers are concerned with keeping their home and/or automobile.  Although each state has it’s own exemption laws, which permit debtors to retain a certain amount of both real and personal property, losing assets is a concern for those who have a lot of property or a large amount of equity in their home.  A Chapter 7 bankruptcy calls for the liquidation of any assets that exceed the state’s exemption limit in order to repay creditors, whereas a Chapter 13 bankruptcy typically allows the debtor(s) to retain their property in exchange for repaying all or a portion of their debts through a monthly payment plan. 

Filing for bankruptcy is not an inexpensive process.  Individuals who typically need to file for relief under the current bankruptcy law often struggle while coming up with the money to pay the filing and/or attorney fees.  A Chapter 13 case is generally more expensive than a Chapter 7 filing, although the latter has seen a price increase following the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.  When the new bankruptcy law became effective, the added paperwork necessary forced many lawyers to increase the fee that they charge filers for the handling of their bankruptcy case. 

One of the greatest differences in a Chapter 7 and Chapter 13 bankruptcy is that one of two requires a regular source of income.  A Chapter 7 bankruptcy is designed to completely ‘wipe out’ most or all debts, but a Chapter 13, because it involves a repayment plan, must be approved by the court and the amount paid will be based on the debtor’s current income.  This means that in order to file for Chapter 13 bankruptcy, the debtor must have a steady source of income.  If an individual files for Chapter 13 and is approved for the plan, he/she will be expected to make timely payments in accordance with the agreement.  If the financial situation changes during the course of the Chapter 13 plan, the debtor may request to convert his/her case to a Chapter 7, which may allow for the remaining portion to be discharged without further obligation. 

The information contained in this article is designed to be used for reference purposes only.  It should not be use as, in place of or in conjunction with professional legal or financial advice.  For additional information relating to the filing of bankruptcy, consult a local attorney who specializes in bankruptcy law.