Chapter 7 and Chapter 13 Bankruptcy. What’s the Difference?

A large majority of bankruptcy petitions filed in the United States involve personal bankruptcies. Those consist of Chapter 7 and Chapter 13 petitions. What influences the decision on filing under Chapter 7 or Chapter 13 is the debtor’s income.

Chapter 7

A Chapter 7 bankruptcy wipes the slate clean. It discharges unsecured debt. Typical unsecured debt can consist of medical bills, credit card debt, utility bills and other loans or credit that was given without any type of security or collateral. Chapter 7 bankruptcy is for individuals who might have lost their jobs and now have little or no income. The time frame from date of filing to date of discharge is three to five months. If a person is over the Chapter 7 limits, he or she might be a suitable candidate for a Chapter 13 bankruptcy.

A Chapter 7 bankruptcy involves a trustee who is appointed for purposes of confirming that the debtor qualifies for Chapter 7 protection and selling the debtor’s property that isn’t exempt from creditors to pay them back. Most Chapter 7 petitioners don’t have any nonexempt property, so their creditors must take the loss. Both individuals and businesses can file for Chapter 7 bankruptcy.

Chapter 13

Should a debtor have a regular income and not qualify for Chapter 7 protection, he or she might petition for Chapter 13 relief and pay back a percentage of their debt pursuant to a three to five year payment plan that’s approved by the bankruptcy court. Chapter 13 relief is often sought by debtors who own a home and want to avoid foreclosure. It allows them the opportunity to get caught up on mortgage payments that are in arrears. Since a Chapter 13 bankruptcy permits a repayment plan, it’s often referred to as a personal reorganization. Monthly payments are made to the bankruptcy trustee. The amount to be paid to the trustee depends on the debtor’s income, the total amount of debt, whether it’s secured or unsecured and what property the debtor owns. Only individuals can seek Chapter 13 protection, but a sole proprietorship is eligible.

Remember that there are income limits on Chapter 7, and if the debtor is over those limits, a Chapter 13 filing is the alternative. After a discharge or reorganization, there are time limits as to when one might file for bankruptcy again.