What Is Chapter 7 Bankruptcy VS Chapter 13?
Written by True Tamplin, BSc, CEPF®
Updated on July 30, 2021
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
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.