Chapter 7 versus Chapter 13 in Bankruptcy, what’s the difference?
When filing for bankruptcy, a debtor has two options. He or she can file under Chapter 7 or Chapter 13, each of which have different requirements and effects.
Though there are other options such as Chapter 11, which is filed when there is a certain level of debt, this is usually more applicable for business. Hence, individuals and couples would resort to either Chapter 7 or Chapter 13, the main bankruptcy cases.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a complete liquidation case. A debtor’s assets will all be liquidated, with the exemption of some that the debtor can keep. The money retrieved would then be used to pay off the creditors. The other unsecured debts would be wiped out, so the debtor would essentially have a clean slate with zero debts.
Usually, a debtor becomes 100% free of his or debts after a Chapter 7 discharge. And because of this, there is a certain income limit. So if a debtor should earn enough to settle some debts, he or she can be ordered to repay the creditors through a payment plan. If they fall below the income limit, they benefit from complete liquidation and wiping out of all their debts.
Chapter 13 Bankruptcy
On the other hand, a Chapter 13 bankruptcy is more protective of a debtor’s assets. This is a repayment plan where the debtor becomes bound to settle his debts in arrears for a period of three to five years. The debtor would still have to pay his or her creditors a certain amount of what they owe.
The court would take a look at the financial capacity of the debtor and determine their disposable income. The disposable income would go into the payment plan and used to settle the debts in arrears.
In a Chapter 13 bankruptcy, the debtor doesn’t necessarily pay for the entire debt and is just given more time to do so. They pay what they can afford and the remaining balance gets wiped out or completely discharged. It’s possible that the debtor only pays for a quarter or in some cases, half of the debt.
Which is better?
The answer to which bankruptcy case is better would depend on the priorities of the debtor. If he or she wants to keep their assets, then a Chapter 13 case is more favorable because it doesn’t involve liquidation.
But generally, debtors prefer the Chapter 7 bankruptcy case because it’s a complete elimination of debt. In Chapter 13, the common scenario is 1% or 99% gets wiped out, depending on the value of the debtor’s disposable income.
Chapter 7 is also a relatively quicker and easier process, usually taking up to four to six months. This is compared to the three to five years payment plan in a Chapter 13 bankruptcy case.