Chapter 7 vs Chapter 13 Bankruptcy: What's the Difference?


If you’re in debt and have expenses that you can’t keep up with your best option at this point might be to file for bankruptcy.

Filing for bankruptcy does not have to be the end of the world. In fact, it could be the thing you need to get your finances back on track. First, you need to learn which type of bankruptcy makes the most sense for you to file under, Chapter 7 or Chapter 13.

Although there are other types of bankruptcies, Chapter 7 and 13 are the two standard forms of bankruptcies made for individuals to file under. To ensure that you know the difference between Chapter 7 vs. Chapter 13, we are going to give you details on both.

Make sure to take notes!

Chapter 7 vs. Chapter 13 Bankruptcy

To qualify for Chapter 7 bankruptcy, you must take and pass a “means test.” A means test is an investigation into someone’s finances. This is different from Chapter 13 bankruptcy, in which there is no means test.

To pass the Chapter 7 bankruptcy means test, you must prove that your income is below the median level in your state and that you are in a tight enough financial situation to need assistance. If your income is above the median income of your state, you must then pass a means test to show that you do not have enough disposable income to pay back some or all your debts.

Opposite to Chapter 7 bankruptcy, bankruptcy Chapter 13 is for people who are above the median income of their state and do have some disposable income to pay back portions of their debt with but are still in dire need of debt relief.

As soon as you file for bankruptcy, whether it is under Chapter 7 or Chapter 13, the government issues an “automatic stay” order on your behalf. An automatic stay order prevents creditors and debt collectors from taking any action against you. Under both Chapter 7 and Chapter 13, the government will also assign a trustee to manage your case.

What is Chapter 7 Bankruptcy?

Chapter 7 is a liquidation bankruptcy.

Under Chapter 7 bankruptcy, the government will sell all your non-exempt property and items to pay creditors. Non-exempt means that the items are eligible to be put up for sale by the government instead of being untouchable, or exempt. Non-exempt items under Chapter 7 bankruptcy include your home, car, and some personal items.

Although most items are non-exempt and thus up for grabs under Chapter 7 bankruptcy, debtors can exempt up to a certain amount of each item. For example, under Chapter 7, debtors can exempt up to $23,675 in homestead and up to $3,775 in a vehicle.

One benefit of Chapter 7 bankruptcy is that it only takes a few months to complete. This is unlike Chapter 13, which takes 3 – 5 years to complete.

Another benefit of Chapter 7 bankruptcy is that it discharges unsecured debt right after the debtor files for bankruptcy. This, again, is unlike Chapter 13 bankruptcy which only discharges remaining debt after the debtor has completed his or her designated repayment plan.

What is Chapter 13 Bankruptcy?

Chapter 13 is a reorganization bankruptcy.

In Chapter 13 bankruptcy, you must make a regular income, have a total unsecured debt of no more than $394,725, and have a total secure debt of no more than $1,184,200.

In bankruptcy Chapter 13, you also must complete a court-ordered 3 to 5-year repayment plan. To obtain a repayment plan, you must submit a repayment plan proposal.

One benefit of Chapter 13 bankruptcy is that you get to keep all your property. Other benefits of Chapter 13 bankruptcy include the facts that you get to reduce your principal loan balance and catch up on missing mortgage, car, and/or other non-dischargeable debt payments.

Also, filing for Chapter 13 bankruptcy will cause your credit score to take a slightly smaller hit than it would under Chapter 7. Plus, your Chapter 13 bankruptcy filing will only show on your credit report for 7 years as opposed to the 10 years that filing Chapter 7 bankruptcy will show on your credit report.

Unlike Chapter 7, bankruptcy Chapter 13 requires its debtors to pay unsecured creditors back an amount equal to the value of their nonexempt assets along with parts of their unsecured debt over the course of their repayment plan. Once this repayment plan is complete, you can discharge all remaining unsecured debt.

How to Know What Type of Bankruptcy is Right for You?

When deciding what types of bankruptcies you should file under, whether it is Chapter 7 vs. Chapter 13, or one of the others, the top things you should consider are:

  • Your income level

  • The amount of disposable income you have available

  • The value of the items and property you own

  • The amount of unsecured vs. secured debt you have

If you have a medium to high level of income for your state, you have some disposable income, you have a sizable amount of valuable property and items, such as a home and a car, and you have a small amount of unsecured debt vs secured debt, Chapter 13 is the way to go. Otherwise, Chapter 7 bankruptcy would be your best bet.

To Learn More Contact The Law Office of Marilyn D. Garner

If you still have questions about which type of bankruptcy is best for you, or you are ready to get started with filing for debt relief, we’re here to help. Call the Law Office of Marilyn D. Garner at 817-381-9292 for your free bankruptcy consultation today!

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