Chapter 7 and Chapter 13 bankruptcies are two common types of bankruptcy filings that people may consider when facing financial difficulties. Both chapters offer debt relief options. However, they differ in several key ways.
Understanding the distinctions between Chapter 7 and Chapter 13 bankruptcies is helpful for anyone looking to navigate the bankruptcy process.
Eligibility requirements
A key difference between Chapter 7 and Chapter 13 bankruptcies lies in their eligibility requirements. Chapter 7 bankruptcy is a liquidation bankruptcy. It is available to those who pass the means test, demonstrating that their income falls below a certain threshold. In contrast, Chapter 13 bankruptcy is a reorganization bankruptcy. It is available to people with regular income who can propose a repayment plan to repay some or all of their debts over a specified period.
Debt discharge process
Another distinction between Chapter 7 and Chapter 13 bankruptcies is the debt discharge process. In Chapter 7 bankruptcy, eligible debts undergo discharge within a few months of filing. This allows people to obtain a fresh financial start relatively quickly. However, not all debts may undergo discharge in Chapter 7, such as certain tax debts and student loans. In Chapter 13 bankruptcy, people reorganize and repay debts in line with a court-approved repayment plan, which may span three to five years.
Repayment plans
Chapter 7 and Chapter 13 bankruptcies also differ in their approach to repayment plans. In Chapter 7 bankruptcy, there is no repayment plan. A Chapter 13 repayment plan involves making regular payments to a bankruptcy trustee who distributes funds to creditors according to the plan’s terms.
According to the Motley Fool, about 70% of people who file for personal bankruptcy file for Chapter 7. About 288,000 Americans filed for Chapter 7 in 2021. About 120,000 Americans filed for Chapter 13 bankruptcy that same year. The type of bankruptcy that may serve debtors most favorably depends on individual circumstances and financial goals.
