Chapter 13 Bankruptcy vs Chapter 7 Explained


Not all bankruptcies are created equal. For most people, Chapter 7 is their first choice, while others pursue Chapter 13 Bankruptcy. Even in times of financial distress it is important to know which option suits you best.

Complementary read: Chapter 7 Bankruptcy, Pros & Cons.

How Chapter 13 Bankruptcy works (in a nutshell).

Chapter 13 is a debt consolidation form of bankruptcy.  Basically, you dump all your debts into a plan, and you pay them back over 3 to 5 years based on very detailed rules set forth by a trustee. During this time the law forbids creditors from starting or continuing collection efforts.

Much like Chapter 7, the process starts when you file a petition with the bankruptcy court in your area, along with a statement of financial affairs, schedules, and other information.

When to consider Chapter 13 Bankruptcy?

  • When your income is too high for Chapter 7.
  • If you need a payment plan on a house or a car, Chapter 13 is the way to go.
  • If you have tax liens or tax levies.

Many times Chapter 13 is the only choice simply because the law requires it based on your income level.

Major Differences Explained:

Chapter 7Chapter 13
Type of BankruptcyLiquidationReorganization
Eligibility Restrictions Disposable income must be low enough to pass the Chapter 7 Means Test.Cannot have more than $394,725 of unsecured debt or $1,184,200 of secured debt.
How long does it take to receive a discharge? Typically three to four months.Upon completion of all plan payments (usually three to five years).
What happens to property in bankruptcy? Trustee can sell all nonexempt property to pay creditors.Debtors keep all property but must pay unsecured creditors an amount equal to value of nonexempt assets.
Allows removing unsecured junior liens from real property through lien stripping? No.Yes (If requirements are satisfied) (Learn about lien stripping).
Allows Reducing the Principal Loan Balance on Secured Debts? Yes but on Tangible Personal Property only (Learn about redemption).Yes (if requirements are satisfied) (Learn about cramdowns in bankruptcy).
Benefits Allows debtors to quickly Discharge Qualifying Debts and get a fresh start.Allows debtors to keep their property and catch up on missed mortgage, car, and Nondischargeable Priority Debt Payments.
Drawbacks Trustee can sell nonexempt property. Does not provide a way to catch up on missed payments to avoid foreclosure or repossession.Must make monthly payments to the trustee for three to five years. May have to pay back a portion of General Unsecured Debts.

Even if Chapter 13 Bankruptcy seems an easier way out, the reality is that almost 60% of chapter 13s filed fail. A financial obligation of this magnitude stretched out over so many years can begin to take a toll. Before you take the plunge, talk with a professional than can help you sort out your options.

Contact us, no obligation.