Lofaro & Headley, LLC


Understanding Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Nov 25, 2023 | Bankruptcy

Navigating financial challenges can be overwhelming, but understanding the distinctions between Chapter 7 and Chapter 13 bankruptcy can shed light on potential solutions.

Both chapters offer relief to individuals facing debt-related difficulties, but they operate in distinct ways.

Chapter 7: The liquidation route

Chapter 7 bankruptcy involves selling your assets to pay off your debts, a process known as liquidation. This type of bankruptcy is generally quicker, lasting about three to six months. The court appoints a trustee to oversee the liquidation process, ensuring fair distribution of the proceeds among creditors. Once the process concludes, the individual receives a fresh start as the court discharges most remaining debts. In 2022, 239,125 people filed for Chapter 7 bankruptcy.

Chapter 13: The repayment plan

On the other hand, Chapter 13 bankruptcy involves creating a repayment plan. If you have a regular income and can contribute a portion of it toward repaying your debts, Chapter 13 might be the appropriate choice. The repayment plan spans three to five years, during which you make monthly payments to a trustee, who then distributes the funds to your creditors. Unlike Chapter 7, you retain control of your assets under Chapter 13, as long as you adhere to the repayment plan.

Key differences: Eligibility and property

One key distinction lies in eligibility. Chapter 7 is available to those with limited income, whereas Chapter 13 is an option for individuals with a steady income. Additionally, the treatment of property differs. Chapter 7 may require the sale of non-exempt assets, while Chapter 13 allows you to retain your property as long as you meet the repayment obligations outlined in your plan.

Each chapter has its advantages and drawbacks, and the choice between them should align with your financial situation and goals.