What is the Difference Between a Chapter 7 and a Chapter 13 Bankruptcy?

After you have decided to file for bankruptcy, you may have to choose between the two types of bankruptcy proceedings that are available for individuals – Chapter 7 bankruptcy and Chapter 13 bankruptcy – depending on your eligibility for each. Deciding which type of bankruptcy is right for you is an important choice, because the type will determine whether you have to pay back at least a portion of your debts. However, in some cases, you may not be eligible for one type of bankruptcy or the other, so you will not have a choice as to what type of bankruptcy to file.

Chapter 7 Bankruptcy Overview

In Chapter 7 bankruptcy, you are able to get most of your debts discharged; in other words, you won’t have to pay back most of your debts. In return, the bankruptcy trustee, who is the person designated by the court to manage your bankruptcy proceedings, can take property that you own (with some exceptions), sell it, and pay the proceeds to your creditors, or the people to whom you owe the debts. For instance, if you own a house with little or no equity in it, and you owe a mortgage debt on that house, your bankruptcy trustee can sell the house and give any proceeds to the bank that holds your mortgage debt.

Chapter 13 Bankruptcy Overview

On the other hand, Chapter 13 bankruptcy requires you to pay back all, or at least a portion of, your debts. Therefore, Chapter 13 is like a repayment plan that can last over several years. The amount that you have to pay, and the time period in which you have to pay it, will vary according to the amount of debts that you owe, your ability to pay the debts back, and the amount of property that you own. In this type of bankruptcy, then, your property is not typically sold; you get to keep it, so long as you comply with the terms of the repayment plan.   

As noted above, however, there are income limitations on filing Chapter 7 bankruptcy, and debt limitations on filing Chapter 13 bankruptcy. These limitations have become stricter under the new bankruptcy laws. If you have filed for Chapter 7 or Chapter 13 bankruptcy in the past, for instance, there are time limitations on how soon you can again file for Chapter 7 bankruptcy.

There are may be some strategic reasons for choosing Chapter 7 over Chapter 13. Obviously, Chapter 7 bankruptcy, if you qualify, will give you the best chance at a fresh start, as you will not have to pay back most of your debts. If you are behind on your mortgage or car loan payments and you really want keep your house or car, however, filing Chapter 13 may be the only way to do so; if you file Chapter 7, you could lose your house and car altogether, depending the amount of equity that you have in them. Furthermore, if you have a lot of debts that you cannot discharge in Chapter 7 bankruptcy, such as student loans or child support, then by filing Chapter 13, you can repay those debts over time, which may help your financial situation.

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