How Are Chapter 7 and Chapter 13 Bankruptcy Different?

From an unexpected job loss or devastating divorce to mounting medical bills or the threat of foreclosure, filing for bankruptcy can be a crucial financial lifeline for individuals struggling to make ends meet. According to the Judiciary Data and Analysis Office of the U.S. Courts, about 12.8 million Americans filed for bankruptcy between 2005 and 2017. 

When pursuing a claim, individuals usually file under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Deciding which form of bankruptcy to file for will depend on several factors, including income level, type and amount of debt and how quickly an individual needs financial relief from monthly payments. 

Liquidating Assets Vs. Restructuring Debt 

For debtors who have limited assets and whose debts are mostly unsecured, such as personal loans, medical bills or credit cards, filing under Chapter 7 may be preferable. Under this bankruptcy type, a bankruptcy trustee gathers and sells off debtor assets to pay creditors—a process known as liquidation. However, a debtor may claim certain property as exempt, including a home, personal vehicle, clothing or other items considered life necessities. This type of bankruptcy usually takes two to four months to complete. 

To qualify for Chapter 7, however, an individual must be able to show that his or her household income after basic expenses is below a certain amount. Those with higher incomes or valuable assets that they would like to maintain possession of may choose to file a Chapter 13 claim instead. In this bankruptcy type, the debtor has an opportunity to propose an income-based repayment plan over the course of three to five years, after which the debtor may receive a discharge of most remaining debts. 

Debt That Bankruptcy May Not Discharge 

While both Chapter 7 and Chapter 13 bankruptcy may help to eliminate many forms of debt, it may not be possible to discharge certain financial obligations through bankruptcy. Examples include spousal and child support, unpaid taxes and court restitution orders.