The Differences Between Chapter 13 and Chapter 7

Bankruptcy offers a great opportunity to get a fresh financial start, although it can be a complex process. One of the most perplexing parts of bankruptcy is figuring out which type to file, as each has its advantages and disadvantages.

Let's take a quick look at some of the most notable differences between two of the most common types of bankruptcy, Chapter 7 and Chapter 13.

If you decide to file for bankruptcy, there are two main routes that you can follow ─ Chapter 7 or Chapter 13. What are the differences?

Difference #1: Chapter 7 Is Usually Faster

The primary component of a Chapter 7 bankruptcy is liquidation of the filer's nonexempt property. The proceeds from these sales are then used to pay off as much of the debt as possible, with anything that can't get paid off being discharged. This liquidation process typically lasts three to five months, and the discharge of debt can take up to four months after filing. However, it's important to note that while all your debt will be discharged, you'll typically need to surrender assets like property or cash to help pay off creditors.

In contrast, Chapter 13 bankruptcy's defining characteristic is the repayment plan, which usually takes three to five years to complete. You'll keep your property with a Chapter 13 filing, but you'll need to make all payments on time. The discharge will be effective within four months of filing.

Difference #2: Chapter 7 Has Stricter Eligibility Requirements

It's easier to wipe away more of your debts in a Chapter 7 bankruptcy compared to a Chapter 13 bankruptcy. Because of this, Chapter 7 has more stringent eligibility requirements, most notably, passing the means test. To pass this financial test, you'll need to prove that your income is lower than the median income of a comparable household in your state.

Additionally, the Chapter 13 means test will work to determine whether you have sufficient funds to pay off most of your debt through a repayment plan. Chapter 7, on the other hand, will require you to surrender or sell property to satisfy creditors.

Difference #3: It's Easier to Keep Your Property With Chapter 13

Both types of bankruptcy provide certain exemptions for property, such as a car, household goods, and some of the equity in a home. When a property is exempt, your creditors can't go after it. However, creditors can go after your nonexempt property and use that property to pay off your debts. Chapter 13 bankruptcy has a mechanism in place to prevent this.

The catch is that you must pay your unsecured creditors through your repayment plan. You'll normally need to make enough payments so that they add up to an amount that's equal to the value of the nonexempt property you're trying to keep.

Difference #4: Impact on Your Credit Report

Another key distinction between Chapter 13 and Chapter 7 is the filing's effect on your credit report. Both types stay on your credit report for a while, but Chapter 13 stays on your report for only seven years. Chapter 7, on the other hand, shows up for a full decade after you're filing, which could make a difference if you're hoping to buy a home or finance a vehicle in the coming years.

The optics of Chapter 13 look better to future lenders, as well. Since you're repaying your debt, creditors may look more favorably on a Chapter 13 bankruptcy, which shows you made a concerted effort to pay off the debt. In the long run, Chapter 13 could put you in better financial standing.

You Can Switch Bankruptcies

No matter which bankruptcy you choose, your circumstances or goals might change. In that case, you can always opt to convert your bankruptcy case from 13 to 7 or vice versa.

Still Unsure About Which Bankruptcy to File?

Of course, a reputable bankruptcy attorney will help you weigh the pros and cons of these two remedies and steer you in the right direction. By contacting me at The Craig Black Law Firm, you'll get an experienced bankruptcy attorney who can help you decide which bankruptcy is right for you. When you call, I'll be answering the phone myself, and I will be more than happy to discuss your case and guide you through this challenging time. Call me today at (678) 888-1778.