Chapter 13 and Chapter 7 both provide debt relief for consumers who are no longer able to meet all their financial obligations. There are some key differences between the two types of bankruptcy, however. Knowing how the two types of personal bankruptcy differ will help people better understand which type is likely better for their situation.
Chapter 7 bankruptcy is known as liquidation bankruptcy while Chapter 13 involves a debt repayment plans. After filing the bankruptcy petition and undergoing credit counseling, a person filing for Chapter 7 will surrender all of his or her non-exempt assets and the proceeds will be used to satisfy creditors. In contrast, Chapter 13 requires the filer to develop a debt repayment plan that will allow them to use their disposable income to repay creditors over a period of three to five years. This difference means that Chapter 13 will normally be a viable option for people who have a regular income that is sufficient to cover basic living expenses, as well as to make payments on the debt.
The eligibility requirements are also different for the two types of bankruptcy. Eligibility for Chapter 7 protection depends on a “means test” and filers who have an income above the state median will usually not qualify. Eligibility for Chapter 13 depends on the filer’s amount of debt: His or her unsecured debt must be less than approximately $308,000 and secured debt must not exceed approximately $923,000. In addition, consumers are barred from filing for Chapter 7 if they have already filed for that form of bankruptcy protection at any time in the previous eight years. For Chapter 13, a filer must wait four years after filing under Chapters 7, 11, or 12 or two years after a previous Chapter 13 filing. At the end of the bankruptcy, both types result in discharge of the remaining debt that was either not paid the liquidated assets or through the repayment plan.
Source: American Bar Association, “Comparison of Chapter 7 and Chapter 13 bankruptcy,” accessed Oct. 3, 2014