Understanding the Difference Between Chapters 13 and 7

Chapter 13 is a debt management plan that the debtor participates in for a period of 3 to 5 years. When filing for Chapter 13 bankruptcy, the debtor and his attorneys will prepare a payment plan, which a court will review. The payment plan proposes an amount that will be paid to every creditor each month, based on the debtors financial situation and ability to pay. At the end of the 3 to 5 year payment term, most remaining debt will be discharged.

A Chapter 13 bankruptcy is also known as a wage earners or repayment bankruptcy.

Chapter 7 allows debtors to discharge most unsecured debt without a repayment plan. Chapter 7 bankruptcy shields an individual from creditors as soon as the bankruptcy petition is filed. The process usually lasts around 4 months, at the end of which the debtor will receive a discharge and clean slate.

A Chapter 7 bankruptcy is commonly known as a straight or liquidation bankruptcy. Its goal is to relieve you of indebtedness.

Both Chapters 13 and 7 allow the debtor to keep some secured assets. Neither type of bankruptcy allows a debtor to discharge tax debt, student loans, fines, alimony or child support. There are certain debts that are dischargeable in Chapter 13 but not in Chapter 7. A qualified bankruptcy attorney can advise you of your options in this regard.

Chapter 13 offers certain advantages with regard to secured assets such as mortgages and car payments. Chapter 13 bankruptcy has the ability to stop foreclosures, cram down car loans and strip liens. Co-debtors are also protected under Chapter 13 bankruptcy but not Chapter 7.

Regardless of these advantages, Chapter 7 bankruptcy may still be a debtor’s most powerful tool. Most debts are discharged, the process takes only a few months, the debtor does not have to pay on debts through a payment plan and the process is less expensive. In most cases, you’ll lose little, if any, of your property or assets. Most of your property is secured or exempt, so little, or sometimes nothing, may be left to pay your creditors.

A chapter 13 bankruptcy can be filed more frequently than once every 8 years, and it can be filed at anytime to manage your debt load even if you are not eligible for a discharge due to a prior filing.