Chapter 7 vs. Chapter 13: Which Is Right for Me?

Chapter 7 and Chapter 13 provide different types of bankruptcy relief. Learn how they differ and which option may make more sense for your income, debts, property and financial situation.

Chapter 7 and Chapter 13 Offer Different Types of Debt Relief

If you are considering bankruptcy, one of the first questions you may have is whether you should file Chapter 7 or Chapter 13. Both can provide significant debt relief, but they work very differently.

Chapter 7 is primarily designed to eliminate qualifying debts without requiring a three-to-five-year repayment plan. Chapter 13 allows you to reorganize your debts through a court-approved repayment plan and can be particularly useful when you need to protect property or catch up on past-due payments.

The right choice depends on your income, debts, assets and what you need bankruptcy to accomplish.

How Does Chapter 7 Bankruptcy Work?

Chapter 7 is sometimes called a liquidation bankruptcy, although many people who file Chapter 7 are able to keep their property because of applicable exemptions.

Chapter 7 can often eliminate unsecured debts such as:

• Credit card debt

• Medical bills

• Personal loans

• Collection accounts

• Deficiency balances after repossession

• Many lawsuit judgments

• Certain older income tax debts that satisfy specific requirements

Eligibility depends on several factors, including your income, household size, expenses, assets and prior bankruptcy filings. The Chapter 7 means test is an important part of determining eligibility.

Most routine Chapter 7 cases are completed approximately three to three and a half months after filing.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 allows individuals with regular income to reorganize their financial obligations through a court-approved repayment plan.

Instead of immediately eliminating qualifying debt, you make payments to a Chapter 13 trustee, who distributes the money according to the terms of your confirmed plan. Chapter 13 plans generally last three to five years.

Chapter 13 can be particularly useful if you need to:

• Stop a foreclosure and catch up on past-due mortgage payments

• Protect property

• Catch up on vehicle payments

• Address certain tax debts

• Reorganize unsecured debt

• Obtain bankruptcy relief when Chapter 7 is not available or does not accomplish your goals

You do not necessarily have to repay all unsecured debt in full. The amount you must pay depends on the circumstances of your case.

What Is the Biggest Difference Between Chapter 7 and Chapter 13?

A major difference is that Chapter 7 generally focuses on eliminating qualifying debt relatively quickly, while Chapter 13 uses a repayment plan to reorganize your financial obligations over time.

But the decision should not be based on speed alone.

For example, someone facing foreclosure may qualify for Chapter 7 but need Chapter 13 because Chapter 13 provides a mechanism for catching up on past-due mortgage payments over time.

On the other hand, someone with primarily credit card and medical debt who qualifies for Chapter 7 may have little reason to enter a multi-year Chapter 13 plan.

Which Chapter Is Right for You?

There is no single answer that applies to everyone. Choosing between Chapter 7 and Chapter 13 requires looking at your entire financial situation.

I review your income, expenses, debts, property and what you are trying to accomplish before recommending a particular type of bankruptcy.

Not sure whether Chapter 7 or Chapter 13 is right for you? Schedule a free consultation and I can review your situation and explain your options.