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Some Differences Between Chapter 7 And Chapter 13 Bankruptcy


Most people have heard about bankruptcy and know it’s not something they particularly want to experience. Not everyone, however, understands exactly what goes into filing for bankruptcy, and what it means for you as a consumer.

There are two different kinds of bankruptcy for individuals: Chapter 7 and Chapter 13. Here are some important differences between these two types of bankruptcies.

How Are Chapter 7 and Chapter 13 Bankruptcies Similar?

The biggest similarity between Chapter 7 and 13 bankruptcies is that they represent the two most common ways to legally discharge debt. There’s almost no situation where an individual would take a route other than one of these two options.

“Whichever bankruptcy  you decide, there are two important things to consider. For a Chapter 7 bankruptcy, you should consider whether you would qualify based on the means test and whether you have assets that are  above state exemption amounts. For a Chapter 13 bankruptcy, you should consider what your Chapter 13 monthly payment would be and compare that to what you are currently paying  your creditors to understand affordability”, stated Ben Tejes, Co-Founder and CEO of Ascend Finance that specializes in a bankruptcy and debt settlement calculator.

Both forms of bankruptcy will stay on your credit report for a long time after the process has ended. Chapter 7 bankruptcy can stay on your report for up to 10 years, while Chapter 13 can remain on your credit report for up to seven years.

Bankruptcy lingers on your credit report so long because lenders don’t necessarily want to loan money to people who have a bankruptcy in their past. Having to deal with this process makes getting paid much hard for the lender, who often won’t receive the full amount they were expecting when they made the loan.

Overall, you want to avoid bankruptcy if possible. Consider options like debt settlement through a program like Freedom Debt Relief or debt management through a credit counseling agency before resorting to bankruptcy.

What Makes Chapter 7 and Chapter 13 Bankruptcies Different?

Now that you know the ways the two most common types of bankruptcy are similar, it’s time to understand their differences. This is crucial since they differ in a lot of ways.

Both Chapter 7 and Chapter 13 bankruptcies go by a name other than their legal title. Chapter 7 is often referred to as liquidation, while Chapter 13 is often called reorganization. These names provide some useful context for what happens when you file for each type of bankruptcy.

Here’s a brief rundown of some of the important differences between these two:

– Although Chapter 7 and 13 bankruptcies are the only two options typically available to individuals, it’s also possible for businesses to file for Chapter 7. Only individuals can opt for Chapter 13 bankruptcy.

– It’s essential to understand why Chapter 7 is called liquidation and Chapter 13 is called reorganization. This comes down to how assets are handled during the bankruptcy In liquidation, non-exempt assets are typically sold off in order to pay creditors. This can include your home, vehicle, or other objects. With reorganization, individuals may get to keep their assets, but must adhere to a debt repayment plan.

– As you might have guessed based on the previous point, there’s a big difference between how long it takes to complete the legal proceedings in Chapter 7 and 13 bankruptcies. Liquidation typically happens fairly quickly, as creditors want to get money fast and debtors want to wipe their debt clean. Chapter 13 often goes on for several years, as the debtor must complete their repayment plan mandated by the bankruptcy court. It’s important to note that just because Chapter 7 bankruptcy can legally happen fast, it shouldn’t be taken as a way to get an easy fresh start. That bankruptcy stays on your credit for longer. It’s going to be harder and more expensive to get another vehicle or home with that on your credit report.

Chapter 7 is a slightly more common form of bankruptcy than Chapter 13. There were about 470,000 individuals who filed for Chapter 7 bankruptcy in 2017 versus 295,000 who filed for Chapter 13.

These are some of the most important things to consider when you’re deciding whether Chapter 7 or 13 bankruptcy is right for you — or whether you can make another, less drastic, strategy work. As already mentioned, it’s best to find another means to avoid bankruptcy altogether if possible.