The Differences Between Chapter 7 Bankruptcy And Chapter 13 Bankruptcy


Many people seek the legal debt relief option of bankruptcy each year. Anyone may need to file bankruptcy including Dave Ramsey, the personal finance guru.

One question I get all the time is, “Which is better, Chapter 7 or Chapter 13?”. While I would love if there was a straightforward universal answer, sadly there isn’t. We know that the goal of bankruptcy is a bankruptcy discharge, but the decision between Chapter 7 and Chapter 13 bankruptcy really depends on each individual’s situation.

Both options offer the debt relief and immediate prevention of creditor phone calls, however, there are differences between the two. With that being said, it is important to consider both and see which one makes the most sense for you.


Chapter 13 and Chapter 7 Bankruptcy Preview

You may be in the middle of the decision making process where you are trying to understand all of your different options before making a decision. The main goal of this article is to provide you with the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy to ideally help you make the most informed decision. With all that being said, here is what we will cover in this article:

  1.  Chapter 7 Bankruptcy Overview
  2.  Chapter 13 Bankruptcy Overview
  3.  Factors to Consider When Looking at Chapter 7 and Chapter 13 Bankruptcy
  4.  Pros and Cons to Chapter 7 Bankruptcy
  5.  Pros and Cons to Chapter 13 Bankruptcy
  6.  Alternatives to Chapter 7 and Chapter 13 Bankruptcy
  7.  Using a Bankruptcy Calculator to Estimate Costs, Cons, and Credit Impact

Chapter 7 Bankruptcy Overview

Chapter 7 bankruptcy, also known as the liquidation bankruptcy, is the process where you wipe out all of your unsecured debt and high value assets. However, you can protect certain assets under the federal bankruptcy exemptions. The loss of property is always possible in a Chapter 7 bankruptcy, which is why it is important to understand the bankruptcy exemptions.


How do I qualify for Chapter 7 Bankruptcy?

In order to file a Chapter 7 bankruptcy you need to meet the income requirements. These requirements are based on:

  1.  Household Size
  2.  State of Residence
  3.  Annual Gross Income

Qualification for Chapter 7 bankruptcy is different for each state, so it is important to take a Chapter 7 means test to see if you may qualify for Chapter 7. The Chapter 7 bankruptcy process should only take around 90 – 120 days to complete.


Chapter 13 Bankruptcy Overview

While Chapter 7 bankruptcy takes between 90 – 120 days, Chapter 13 bankruptcy, on the other hand, takes between 3 – 5 years. Chapter 13 bankruptcy is the process where you restructure your existing debt. You can use the bankruptcy forms to estimate your Chapter 13 payment plan example.

Most Chapter 13 plans will be on a 5 year plan, however, if you fall below the median income guideline for Chapter 7 and file a Chapter 13 bankruptcy you may be able to put on a 3 year plan payment.


Should I File Chapter 13 Bankruptcy?

As each individual’s case is different, it is important to consult a local bankruptcy attorney and compare your options before filing bankruptcy. However, here are few reasons why someone may look at filing Chapter 13 bankruptcy:

  1.  Over the median-income guideline to qualify for Chapter 7 Bankruptcy
  2.  Own their home and have more equity than the home exemption limit
  3.  Own high value assets not protected in Chapter 7 bankruptcy
  4.  Filed a Chapter 7 bankruptcy less than 8 years ago


Factors to Consider When Looking at Chapter 7 and Chapter 13 Bankruptcy

There are a handful of different things to consider when deciding whether to file Chapter 7 or Chapter 13 bankruptcy. Here are some of the most common things to consider:


Protected Assets and Property

You may own quite a few high value assets and are worried that you could lose them in a bankruptcy. Understanding the state homestead bankruptcy exemptions can give you an idea if your property may be protected in a Chapter 7 bankruptcy. If you find that you have more equity than what’s protected in the bankruptcy exemption, you can keep your property through a Chapter 13 plan payment.


Median Income Guideline

Seeing if you qualify for Chapter 7 bankruptcy can make your decision making process a bit easier. In order to file Chapter 7 bankruptcy, you need to qualify by taking the Chapter 7 means test. As stated earlier in this article, the median income guideline is based on your household size and state of residence. If you are wondering how to pass the means test for Chapter 7, you can take a bankruptcy calculator to see if you may qualify.


Current State of Mortgage and Car Loan

It may be difficult to protect your home in a Chapter 7 bankruptcy if you are behind on your mortgage payments. With that being said, Chapter 13 stops foreclosure, which can allow you to catch up on your mortgage payments through plan payment.

At the same time, if you are falling behind on your car loan or paying more than what the car is worth, it may be difficult to protect in a bankruptcy. However, if you would like to keep your car and are wondering how to protect your car in a bankruptcy, you can sometimes spread out the car payments to a handful of years in a Chapter 13 bankruptcy.


Pros and Cons to Chapter 7 Bankruptcy

Chapter 7 bankruptcy can be a great option for a lot of individuals, however it is important to understand the pros and cons attached:

  •  Chapter 7 bankruptcy takes between 90 – 120 days
  •  Payment is offered in a one-time payment to wipe out all unsecured debt
  •  Most always attorneys will offer a payment plan to help take care of the Chapter 7 payment
  •  Chapter 7 bankruptcy stays on your credit report for about 10 years
  •  There tends to be a high impact on credit score.
  •  You receive full protection against creditors


Pros and Cons to Chapter 13 Bankruptcy

Similar to Chapter 7 bankruptcy, there are several pros and cons to Chapter 13 bankruptcy as well:

  •  Protection of your property and high value assets that may be liquidated in Chapter 7
  •  Full protection against your creditors
  •  Chapter 13 bankruptcy remains on credit report for 7 years
  •  There tends to be a high impact on credit score, similar to Chapter 7 bankruptcy
  •  The debtor is unable to incur debt or sell assets during the Chapter 13 plan
  •  Process takes between 3 – 5 years, compared to 90 days for Chapter 7 bankruptcy


Alternatives to Chapter 7 and Chapter 13 Bankruptcy

While filing either Chapter 7 or Chapter 13 bankruptcy can be a good option for many individuals, however, there are many alternatives to bankruptcy to consider. Debt management, debt consolidation, and debt settlement are common alternatives to bankruptcy that may be able to work for you.


What is Debt Settlement?

Many people compare bankruptcy to debt settlement when considering debt relief. Debt settlement is the process of negotiating with your creditors to bring down the total amount of unsecured debt owed. You can either try and negotiate with the creditors yourself or work with a debt settlement company to do this for you.


Pros and Cons to Debt Settlement

While bankruptcy may have pros and cons, debt settlement does as well. It’s important to consider the pros and cons to debt settlement below before making a decision:

  •  Pay a lesser amount than what is currently owed
  •  Steer clear of a bankruptcy and pay back the debt over a period of time
  •  Credit impact tends to be medium – high (generally depends on what your score is when you start the program)
  •  May be less expensive and less time than Chapter 13 bankruptcy


Estimate Costs, Cons, and Credit Impact

If you are currently comparing your options and feeling unsure of what you should do next, you can use a bankruptcy calculator to understand all of your options, costs, and include pros and cons to each.

You can either use a Chapter 7 bankruptcy calculator, Chapter 13 bankruptcy calculator, or debt relief calculator to understand costs, cons, and credit impact.


Author Biography: Ben Tejes is the co-founder and CEO of Ascend Finance and writer for a personal finance blog, which educates individuals on the differences between financial hardship options such as bankruptcy, debt settlement, debt management and debt payoff planning.

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