What is the Difference Between Chapter 7 and Chapter 13? 

If you’re struggling financially and have tried things like credit counseling or selling off some assets, you may be considering bankruptcy as your next option. Do a little more research, and you’ll soon discover that there are several different types of bankruptcy available to individuals: Chapter 7 and Chapter 13. Before you can move forward, you’ll want to understand the differences between Chapter 7 and Chapter 13 bankruptcy, so you make the right choice. 

What is Chapter 7 Bankruptcy?

Chapter 7 of the U.S. Bankruptcy Code is intended for people with limited assets, income, or both. To qualify for Chapter 7, you must pass a means test showing that your income falls below an established number for your state. Even if you don’t pass the means test at first glance, you may still be able to qualify. If you are able to file for Chapter 7 bankruptcy, you will be able to wipe out your unsecured debts like medical bills and credit cards. 

How Chapter 7 Bankruptcy Works

As soon as you file for Chapter 7 bankruptcy, the court will assign a trustee to your case. One of the trustee’s duties is to liquidate some of your assets to pay off creditors. Some of the property that a trustee can liquidate includes:

• Bank accounts
• Cash
• Investments
• A second home
• A second vehicle

Some of your assets will be safe from liquidation due to exemptions available under Chapter 7 bankruptcy. These vary by state. For example, in Mississippi, a person can exempt $10,000 of certain types of personal property during bankruptcy. 

What is Chapter 13 Bankruptcy?

Chapter 13 of the U.S. Bankruptcy Code restructures debt and can also wipe some of it clean to give you a more manageable financial outcome. You won’t be asked to liquidate any assets with Chapter 13 bankruptcy because the court will require that you continue to make payments on your debts. This type of bankruptcy works best for people who have steady income, want to avoid asset liquidation, and don’t qualify for Chapter 7. 

How Chapter 13 Bankruptcy Works

When you file for Chapter 13 bankruptcy, you will be assigned a trustee who will help you create a payment plan for your debts as well as schedule a meeting with your creditors. The repayment period for a Chapter 13 bankruptcy lasts from three to five years. Your plan’s terms will depend on your debts and income. Once you complete the repayment plan, any remaining debts will be completely discharged. 

Similarities Between Chapter 7 and Chapter 13 Bankruptcy

If you are trying to make up your mind between filing for Chapter 7 and Chapter 13 bankruptcy, you’ll be happy to know that both have several similarities. Among them are:

Automatic Stay

If you’re in financial trouble, you are probably being harassed by creditors or collection agencies. Both types of bankruptcy include an automatic stay which prohibits any creditor from attempting to collect a debt. They must also stop any repossession, foreclosure, or garnishment actions. 

Discharge of Debt

Both types of bankruptcy will help you eliminate unsecured debt. But you will have to continue paying your debts with Chapter 13 bankruptcy for several years before you can receive a discharge. 

Protection of Property

You get protection of income and property with both Chapter 7 and Chapter 13 bankruptcy. Both offer exemptions, such as a home or car, that won’t be included in your bankruptcy. 

Differences Between Chapter 7 and Chapter 13 Bankruptcy

It’s important to understand that there are several key differences between Chapter 7 and Chapter 13 bankruptcy. Among the main differences are:

Qualification

Qualifying for bankruptcy is different with Chapter 7 versus Chapter 13. You must pass a means test with Chapter 7. But this isn’t a requirement with Chapter 13. 

Time to Discharge

When you file for Chapter 7 bankruptcy, your case can be concluded, and your unsecured debts wiped out in just a few months. With Chapter 13 bankruptcy, you must wait three to five years to get a bankruptcy discharge. 

Repayment of Debts

You won’t be required to make any additional payment on your debts with Chapter 7 bankruptcy after liquidation and discharge. But you will have to continue to make agreed-upon payments with Chapter 13 for multiple years. 

At Gulf Coast Bankruptcy Attorney, our mission is to provide those who are struggling with debt the information they need to make informed decisions about their financial future.