What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

The difference between chapter 7 and chapter 13 bankruptcy is that chapter 7 is a liquidation bankruptcy, while chapter 13 is a restructuring bankruptcy. In chapter 7, your nonexempt assets are seized and sold to pay your creditors. In chapter 13, you keep your assets but must create a debt repayment plan.

Is Chapter 13 Bankruptcy Better Than Chapter 7

Chapter 13 bankruptcy is not better than chapter 7, but it does have some advantages. You keep most of your assets under chapter 13, however you are still on the hook for repaying the majority of your debt. In chapter 7 you may lose your assets but the proceeds will go to your creditors to reduce the amount you owe.

Should I File Chapter 7 Or Chapter 13 Bankruptcy

Chapter 13 and chapter 7 bankruptcies are better for different circumstances. If your debts are completely unpayable, then chapter 7 is likely the better debt relief option. If your debts are almost payable but you need more time and/or better terms, then you should file chapter 13 instead.

What Is Chapter 7 Bankruptcy VS Chapter 13 FAQs

Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors. 
There are three common types of bankruptcy known as “chapters” in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.
Chapter 7 is known as a liquidation bankruptcy. Most of your property will be sold to pay off your debts, then whatever debt in excess of the value of your liquidated property will be cleared.
Chapter 13 bankruptcy is a reorganization bankruptcy. With Chapter 13, you are able to keep your personal property and reorganize your debts to a payment schedule that enables you to pay back your creditors over time (often 3 to 5 years).

What Is Bankruptcy?

What Is Bankruptcy? The Three Chapters of Bankruptcy

There are three common types of bankruptcy known as “chapters”in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.

Ch. 7 Bankruptcy

The most common type of bankruptcy is Chapter 7. Chapter 7 bankruptcy is known as “straight”or “liquidation”bankruptcy. It is designed to give a “fresh start”by discharging debts that cannot be repaid through the liquidation of the debtor’s assets. Upon filing Chapter 7, a trustee is appointed to sell the debtor’s non-exempt assets and distribute the proceeds to creditors. For individuals, the law exempts certain assets such as retirement funds, primary residence, tools for their trade, and personal vehicles from being liquidated to pay back creditors. This pays back creditors some of what they are owed and protects individuals from having all of their livelihood taken from them.

Ch. 11 Bankruptcy

Chapter 11 bankruptcy is primarily for companies, allowing them a break on paying their debts in order to restructure, come up with new terms for paying their creditors, and become profitable again. This allows companies to stay afloat while coming up with a new way to pay back creditors. Chapter 11 is the most complex and expensive form of a bankruptcy proceeding and should therefore be considered after other options have been explored.

Ch. 13 Bankruptcy

Chapter 13 bankruptcy, known as a “Debtor in Possession” Bankruptcy, stands in contrast with Chapter 7 because it allows the individuals to keep from liquidating their property. Chapter 13 creates a new, more affordable payment plan for the debtor to repay creditors, usually lasting 3 to 5 years. Once the payment plan is finished, the remaining unsecured debts are discharged.

You Can Avoid It

Bankruptcy is the least thing any business would want to experience. But sometimes because of reluctance, many business owners limit themselves from exploring the many benefits of getting help from financial advisors. Financial advisors can be a great help in steering a business to the path of profitability. Connect with a financial advisor in Beachwood, OH or check out our financial advisor page to see one closest to your area.

Bankruptcy FAQs

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.