What is the difference between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 bankruptcy is the most common type of personal bankruptcy filed, although not all debtors will qualify for Chapter 7. After changes to bankruptcy laws in 2005, debtors whose income was too high were no longer allowed to file Chapter 7 bankruptcy to immediately discharge debts, but were instead, required to file Chapter 13 Bankruptcy and repay part or all of their debts.

So what's the difference between the two? Chapter 7 bankruptcy is a liquidation bankruptcy, and it allows debtors to discharge most of their unsecured debts within 3 to 6 months after filing their bankruptcy petition. Chapter 7 does not eliminate all unsecured debts. For instance, child or spousal support, student loans (with exceptions) and most tax debts are not eliminated. It does, however, discharge other common types of unsecured debts such as credit card debts, medical bills and other unsecured personal loans. Chapter 7 bankruptcy will not discharge home or car loans.

So how does Chapter 7 bankruptcy work? First, a trustee is assigned to your case. If you have any assets which are not exempt from bankruptcy, the trustee will sell those assets and use the proceeds from the sale to repay your creditors in priority order. Not all assets can be liquidated. For instance, state and federal bankruptcy laws will determine whether some of your assets are exempt or protected from bankruptcy. Many debtors will not have any assets which can be sold; this is called a no-asset bankruptcy. After the liquidation and sale, the qualifying unsecured debts will be discharged.

Chapter 13 Bankruptcy Overview

Chapter 13 Bankruptcy does not allow for the immediate discharge of debts but allows you to create a 3 or 5 year debt repayment plan to repay your creditors. If you complete the repayment plan and meet the requirements of the plan, the unsecured debts which remain at the end of the plan will be discharged. Chapter 13 bankruptcy generally allows you to keep your home and car, assuming you continue to make the mortgage or loan payments and complete making payments for all back payments within the plan.

Filing bankruptcy is a very important financial decision. You may be able to file a simple Chapter 7 no-asset case without legal help, but most debtors will need legal assistance if they are filing Chapter 13 bankruptcy and they want to keep their assets.

Filing bankruptcy will also lower your credit score, it will remain on your credit report for seven to ten years, and it will make it difficult to get low cost loans. Most experts recommend filing bankruptcy only as a last resort. If possible, creating a budget and trying to repaying your debts is always preferable to filing bankruptcy.