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What Are The Differences Between Chapter 7 vs. Chapter 13 Bankruptcy?

Declaring bankruptcy can provide much-needed relief if you are overwhelmed with debt. Two of the most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. While both can eliminate some debts, there are important differences to understand before deciding which is right for your situation.

Overview of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is often referred to as “liquidation” bankruptcy. When you file for Chapter 7:

  • Most unsecured debts like credit cards, medical bills, and personal loans are eliminated. However, you will still owe secured debts like mortgages and car loans.
  • The bankruptcy court can force you to sell some assets to pay back as much debt as possible. However, you are allowed to keep certain exempt assets like clothing, basic household items, and primary residence in some cases.
  • The entire process typically takes 3-6 months.
  • You can only file Chapter 7 bankruptcy if you qualify by passing the “means test” regarding your income.

Overview of Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to restructure and repay some debts over 3-5 years. When you file for Chapter 13:

  • You get to keep all assets, including those that are not exempt. Creditors cannot seize your property.
  • Your repayment plan depends on your disposable income and what you can afford to pay back. Plans are typically approved if they offer creditors as much as they would receive in Chapter 7 bankruptcy.
  • All collection calls and legal actions against you are put on hold while your repayment plan is in effect.
  • If you stick to the repayment plan for the entire term, the remaining unsecured debt is eliminated.

Key Differences

Chapter 7 Chapter 13
Liquidation bankruptcy Restructuring bankruptcy
Unsecured debts eliminated Repay portion of debts over time
Assets may be liquidated Keep all assets
Fast process (3-6 months) Slower process (3-5 years)
Must pass means test to qualify More flexible eligibility

Some key things to keep in mind when deciding between Chapter 7 and Chapter 13 bankruptcy:

  • Chapter 13 allows you to keep assets like a house or car, making it preferable if those assets are priorities.
  • Chapter 7 provides faster debt relief, so it may be better if liquidating assets is not a major concern.
  • Chapter 13 has more relaxed eligibility standards regarding income limits.
  • Chapter 13 plan commitments can be challenging but provide opportunity to save money long-term by repaying debt at reduced interest rates.

Getting Help Evaluating Bankruptcy Options

The best path forward depends heavily on your specific financial situation. Reputable bankruptcy lawyers can provide tailored advice regarding whether Chapter 7 or 13 is better for your needs after reviewing your unique circumstances. The lawyers at [Smith & Smith Attorneys] have extensive experience guiding clients through comparing Chapter 7 vs Chapter 13 bankruptcy in [your state]. I highly recommend scheduling a consultation if you are weighing bankruptcy. Their lawyers can give insider tips about recent changes to bankruptcy laws as well which may impact your decision.

More Information and Resources

For additional details about the pros and cons of both Chapter 7 and Chapter 13 bankruptcy, check out the following helpful overviews:

  • [Chapter 7 Bankruptcy Explained] (Nolo)
  • [Chapter 13 Bankruptcy Explained] (The Balance)

You can also discuss your options on bankruptcy-focused forums like r/bankruptcy on Reddit to connect with others who have gone through the process. I hope this gives you a good starting point for understanding the key differences between Chapter 7 and Chapter 13 bankruptcy and deciding which path to take. 

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