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What is the difference between Chapter 7 and 13?

On Behalf of | May 31, 2022 | Bankruptcy |

The two main types of bankruptcy used by consumers are Chapter 7 and Chapter 13. There are advantages and disadvantages to both, and it is also true that not everyone would qualify for both types.

As such, it’s important to know what the differences are and which one would be applicable to your situation. If you’re considering bankruptcy, you’ll want to think about your goals, your financial situation and which chapter will help you find the financial freedom that you’ve been seeking.

The main difference

The biggest difference between the two is simply the way that the debt is handled. With Chapter 7 bankruptcy, often known as liquidation bankruptcy, the process involves the liquidation of the assets that you own. After your non-exempt assets are sold – many assets are exempt, such as the tools of your trade or your primary vehicle – then the money is used to pay off a portion of the debt that remains. After that, the rest of the debt is forgiven and you can begin working to build up your credit score once again.

With Chapter 13, the debt is not eliminated. You also don’t have to liquidate assets. Instead, your debt is consolidated into a single payment plan. You’re then given a set amount that you have to pay every month for the next three to five years. As long as you make those payments, they slowly pay off the debt that you owed. At the end of the term, your debt will not have been erased, but you still get a fresh start because it will all have been paid off.

The benefit of Chapter 13 is that someone who still earns a good wage may be able to get a consolidated plan that makes the debt affordable to them. Many times, people who are struggling with overwhelming debt just owe a variety of creditors at the same time. They can’t afford to pay everyone back at once, but spreading the debt out over the next five years makes it so the payments fit their budget.

What will work for you?

As noted above, there are also strict qualifications, and someone who earns a significant amount of money may not qualify for Chapter 7 on the grounds that they could afford Chapter 13. It’s important to keep all of this in mind as you look into your legal options and consider which type of bankruptcy would be best for you.