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Chapter 7 Bankruptcy vs. Chapter 13 Bankruptcy

Individuals may file for bankruptcy under Chapter 7 or Chapter 13.  Chapter 7 and Chapter 13 both allow a debtor to get a better handle on their financial situation.  But filing for Chapter 13 may not be as damaging to the debtor’s credit as Chapter 7 because the debtor generally pays back more of their debt under Chapter 13.

Chapter 7 bankruptcy involves the complete liquidation of assets. Therefore, chapter 7 is suitable for individuals who have little to no property as well as little to no money left after expenses are paid every month. Individuals who choose to file chapter 7 are often unable to repay debt under a repayment plan. Under chapter 7 bankruptcy, most unsecured debts are discharged. This includes credit card debt, medical bills, and personal loans. In addition, it takes as little as three months to obtain a discharge order on such debts under chapter 7.

In contrast, chapter 13 bankruptcy adjusts the debts and devises a payment plan for the debtor to pay back the creditor. Chapter 13 is suitable for individuals who have significant equity in a home or other property and desire to keep the property.  Under chapter 13, a debtor can keep most of his/her property during the three to five-year repayment period. During the repayment process, the individual pays one monthly payment to a bankruptcy trustee, who in turn distributes the money to the various objecting creditors. Unlike chapter 7, a debtor does not receive an immediate discharge of debts. The debtor must complete the payments under the proposed plan in order to receive a discharge of debts. During the repayment process, the debtor is protected from any creditor actions such as lawsuits and garnishments. Filing under Chapter 13 also allows the debtor to keep all of their assets, saving their home from foreclosure and their vehicle from repossession.  Chapter 13 may provide better protection to cosigners and debtors have no direct contact with creditors.  Also, there are more debts that are dischargeable under Chapter 13.

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