Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy
The United States Bankruptcy Code outlines two types of personal bankruptcy for Americans who are struggling with debt: Chapter 7 and Chapter 13 bankruptcy.
As you begin the bankruptcy process, it's a good idea to understand the differences between the two types so you can start to determine if either type can address your financial needs.
To learn how each chapter of bankruptcy could work in your specific situation, speak with a bankruptcy attorney near you today. Simply fill out our free case evaluation form to get started now.
Chapter 7 & Chapter 13
CHAPTER 7(Discharge Unsecured Debts) |
CHAPTER 13(Interest-Free Repayment Plan) |
| Chapter 7 is often used if: |
Chapter 13 is often used if: |
| You own few assets, aside from basic household essentials |
You own valuables items, like a valuable home or car, and wish to keep them |
| You have limited income and have little or nothing left over after paying utilities and other essential bills each month |
You have regular source of income and can afford living expenses, but need help catching up on debt obligations |
| Benefits of Chapter 7: |
Benefits of Chapter 13: |
| Unsecured debts may be discharged (completely eliminated) by the court |
Past-due secured debts can be repaid, and unsecured debts may be partially or fully eliminated |
| The process is quick — a discharge is typically granted in just a few months |
The court offers its protection over a three-to-five year period, during which time debts are settled in monthly, interest-free payments |
| Lawsuits, garnishments and collection calls are stopped by the automatic stay - and creditors can't attempt to collect on discharged debts |
Foreclosure and repossession can be halted and missed payments can be made up over time - plus all other creditor collection attempts must stop |
|
Co-signers on loans are protected |
| Who can file for Chapter 7? |
Who can file for Chapter 13? |
| Debtors must qualify under the "means test", which compares income and living expenses to those of similar household sizes in the same state |
Debtors must have a regular source of income that can be used to make payments over time, and must have debts below the limit set by the federal government |
| Learn More About Chapter 7 » |
Learn More About Chapter 13 » |
Chapter 7 & 13 Similarities
Certain characteristics of personal bankruptcies are shared between Chapter 7 and Chapter 13 bankruptcy.
No matter which chapter you decide to file under, you can likely expect the following:
- Credit Counseling Briefing: The bankruptcy court will not accept your petition unless you complete a credit counseling briefing before filing. You can do this online, over the phone or in person.
- Automatic Stay: As soon as you file your bankruptcy with the court, an automatic stay usually takes effect. This stay offers you protection from creditors – it remains in effect throughout the duration of your case and while it's in effect, all collection action against you is prohibited.
- Debtor Education Course: Before you're eligible to receive your bankruptcy discharge, you'll have to complete a debtor education course. Like the credit counseling briefing, it can be completed online, over the phone or in person.
Filing Chapter 7 Bankruptcy
In order to file under Chapter 7, you must pass the Means Test, which is a comparison of your family's income to the median income of a family your size in your state.
Depending on where you fall financially, you may have to calculate your disposable income and crunch a few other numbers. A bankruptcy lawyer can help you work out the details.
If you qualify for Chapter 7 bankruptcy, you can likely look forward to certain benefits such as:
- A quick-moving case: you'll likely get your discharge within six months
- Forgiveness of many of your unsecured debts: once the court excuses you, you have no legal obligation to pay those creditors
- Relief from creditors' hassles: as soon as the automatic stay takes effect, creditors cannot take any collection action against you. After you receive your discharge, creditors are still prohibited from contacting you.
Chapter 7 Bankruptcy Might Suit You If...
People often consider Chapter 7 bankruptcy if they have little or no money left over after paying for necessities each month, or if they have trouble affording even basic expenses
Similarly, those who don't own much besides necessary items (car, work tools, clothes, etc.), may find that the protection offered by Chapter 7 may work well for them.
Learn more about Chapter 7 bankruptcy.
Chapter 13 Bankruptcy (Debt Reorganization)
Chapter 13 bankruptcy is sometimes called reorganization bankruptcy because filers are not excused from their debts, but rather given a chance to repay them over a period of three to five years.
Thanks to the Chapter 13 repayment plan, filers are able to repay past-due debts while making payments on current obligations.
Filing Chapter 13 Bankruptcy
Unlike Chapter 7 bankruptcy, there is no official "test" to qualify to file Chapter 13 bankruptcy, but you must also be able to afford necessities each month and have enough money left over to make regular payments.
For most people, this means having a regular source of income.
If Chapter 13 turns out to be the best fit for you financially, you can probably anticipate certain advantages, including:
- You'll likely have between three and five years to get caught up on your debts; during that time, the automatic stay will protect you from all collection actions.
- You can likely keep important possessions that might not be exempt in a Chapter 7 filing.
- You'll only be responsible for one lump payment to your bankruptcy trustee (who will then distribute it among your creditors) as long as your bankruptcy case is pending. That means you probably won't have any direct contact with creditors for three to five years.
- You may be able to protect your cosigners from having to take over your debts.
Chapter 13 Bankruptcy May Suit Those Who...
You may consider filing under Chapter 13 if you have a regular source of income and you can afford basic necessities, but you have trouble making scheduled payments on your debts.
Or, if you have substantial equity in your house or own valuables that you're not willing to let go of, you may also prefer the protections Chapter 13 bankruptcy can offer.
Learn more about Chapter 13 bankruptcy.
Talk to a Bankruptcy Lawyer for Free
If you have specific questions about your financial situation or which type of personal bankruptcy would be the best fit for you, Bankruptcy Central can connect you with a sponsoring bankruptcy lawyer for free and with no obligation.
Just call us at 866-288-7281 or fill out our free case evaluation form and we'll put you in touch with a sponsoring bankruptcy attorney as soon as possible.
The above summary is not legal advice. Bankruptcy laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.