Chapter 7 vs Chapter 13 Bankruptcy

Chapter 7 vs Chapter 13 Bankruptcy: What’s the Difference?

Whether acting as a business owner or an individual, filing for bankruptcy is a serious, life-changing decision that should not be taken lightly. When filing for bankruptcy, you are potentially placing yourself in a vulnerable financial situation and destroying your credit score on a lasting basis.

That being said, declaring bankruptcy is also a necessary step that millions of people take to liberate themselves from unpayable debts and start afresh. When assessing the types of bankruptcy options available to you, you mainly have two choices. These are Chapter 7 vs Chapter 13 bankruptcy.

Each of these has major pros and cons, with each having a different appeal to different types of debt holders. Read on to find out which is right for you. 

1. How Does Chapter 7 Bankruptcy Work?

First, let’s start with how Chapter 7 bankruptcy works. Chapter 7 is routinely described as “liquidation bankruptcy”, as filing for this requires you to sell some or all of your assets to pay down your debts. This is the preferred option for those that do not own their own home or who perhaps have a limited income stream.

This option is only available to those who mean a Chapter 7 “means test”, which will determine whether or not your income is low enough to qualify. If you do qualify for Chapter 7, then you will be appointed a trustee. This trustee is responsible for selling all of your assets that they can in order to pay off your non-dischargeable debts.

Meanwhile, anyone granted Chapter 7 can benefit from an automatic stay that legally prevents all creditors from pursuing your debts. Finally, Chapter 7 automatically removes all dischargeable debts, such as medical debt and credit card debt. To understand if you are eligible for Chapter 7, always hire a competent bankruptcy attorney.

2. How Does Chapter 13 Bankruptcy Work?

Chapter 13 Bankruptcy is known as a “restructuring” form of bankruptcy. It allows you to reorganize and consolidate all of your debts and attempts to pay them all or partially down over a fixed period. This form of bankruptcy is best suited to those with a high and secure income stream that allows them to pay off their consolidated debt.

How much you actually pay will depend on how much you earn and what assets you own. In many cases, a portion of the debt will be erased from your books. Chapter 13 is best for those who have a large amount of non-dischargeable debt such as child support arrears who might not qualify for Chapter 7. 

3. Chapter 7 vs Chapter 13 Bankruptcy: Which is Better?

When assessing Chapter 7 vs 13 Bankruptcy, it is important to look at the benefits of each. Let’s start with the benefits of Chapter 7:

  • A truly fresh start that erases your dischargeable debt permanently
  • Future income and assets are completely safe
  • No limitations on the amount of debt that is eligible 

Meanwhile, the benefits of Chapter 13 include:

  • Prevents your home from falling into disclosure 
  • You only pay back what you can afford
  • Debt discharging means you usually only pay back a fraction of what is owed 

More Tips for Smarter Financial Decisions 

Now that you know the ins and outs of Chapter 7 vs Chapter 13 bankruptcy, you can begin to make more informed choices about your financial future. For this, we have got you covered. Make sure to consult our expert Money & Market guides for updated tips and information on the money matters that count. 

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Christophe Rude

Christophe Rude

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