Bankruptcy: Chapter 7 vs. Chapter 13

Updated: Jul 4, 2024

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Many people have heard the terms Chapter 7 or Chapter 13. These terms are referring to bankruptcy, which is a petition that people or businesses file when they are no longer able to pay back the debt. Filing bankruptcy is a way of getting relief from the debt, however, the choice needs to be made between the 2 major kinds.

Bankruptcy may be the only option for people when their debt has reached levels to which they can no longer make payments. Creditors begin calling and payments are either late or not being made at all. This can as a result of incurring too much debt or because of job lay-offs. When a person no longer has the income to pay the debt, bankruptcy is considered.

There are a total of six different kinds of bankruptcy within the United States, however, the two most common are referred to as Chapter 7 and Chapter 13. These ranges greatly and can have a significant impact on a person if the wrong one is chosen.

A person cannot file for bankruptcy often (no more than once every 8 years), so it’s important to make a sound decision. This is why lawyers are often involved and can help make the decision between the Chapters much easier. A means test will be conducted as well, which will determine if they have the “means” to pay back any of their debt.

Chapter 7

When a person files Chapter 7, they are eliminating all of their debt. Being able to file Chapter 7 would require a person to pass the means test, that is, showing that they do not have the means to pay the debt. This is considered liquidation or straight bankruptcy. It is also considered the quickest form of bankruptcy.

A debtor would surrender the non-exempt property to a bankruptcy trustee. That trustee then liquidates the property and distributes the money from the sales of such property to all creditors.

This property includes:

  • Homes (Vacation and regular)
  • Boats
  • Other vehicles

Things such as household goods, appliances, and trade tools are protected from being collected, however, the exemptions will vary a little from state to state.

Chapter 13

Chapter 13 bankruptcy is a way of developing a plan to repay all or a portion of the debts. If a person does not pass the means test for Chapter 7, this is typically the default. The lawyer will typically work with creditors to reduce the amounts of debt, either dismissing them entirely or significantly reducing them so that it is easier for a person to pay. This is known as Wage Earner Bankruptcy.

This Chapter is chosen so that the debtor can keep possession of all of their assets, including home and car. It does require that some portion of the future income goes towards repaying creditors, so it’s not a complete dismissal of debt like Chapter 7.

The amount of time you have to pay back the debt re-established will be based upon regular income. You will be able to propose a new payment plan and then the court will decide whether you will take two years to pay or as much as five years. To payback in a maximum of five years, you must be able to show “just cause” for having the plan extended.

Other Information

The amount of debt and ability to pay said debt will determine which Chapter will be filed. Over 65% of all consumer bankruptcy is Chapter 7. This signifies that 65% of the people who are filing for bankruptcy don’t have the means to pay back the debt. Having a lawyer will help ensure that you are choosing the right Chapter for your financial state, as well as negotiate the best pay-off deal for you at the court.

In today’s economy, debt and income go hand in hand. Layoffs are at an all-time high as companies downsize to avoid their own bankruptcy. It is an option that many people turn to as the creditors stack up. Being able to not make payments isn’t acceptable. A creditor has the right to collect, however, the flip side is that you have the right to file for bankruptcy, too.

Bottom Line

Bankruptcy has provided relief to millions of people and businesses worldwide when debt has gone out of control. Most people choose to get a lawyer involved so that the settlement goes smoother. Bankruptcy opens up options for people to carry on a normal life without creditors haunting them. It all comes down to this: Chapter 7 versus Chapter 13.


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