What’s the Difference Between Chapters 7 and 13 Bankruptcy?

There are several different chapters of bankruptcy. However, if you are just an ordinary person rather than a municipality, a business, a family farmer, or fisherman, there are generally two chapters that apply to you: Chapter 7 and Chapter 13.

Chapter 13 is often referred to as a repayment plan bankruptcy. The idea in a Chapter 13 is that you file a bankruptcy petition and then you prepare a repayment plan where you repay a portion of your debts over a period of three to five years. You do that by making monthly payments. The amount of your payment is dependent on your income and some other factors. If you make all your payments during that three to five-year period, whatever you still owe at the end of that period gets discharged, meaning you do not owe it anymore.

Chapter 7 is often referred to as a liquidation bankruptcy. In a Chapter 7, you generally do not make payments. Instead, it is possible for the trustee, who gets appointed to represent your creditors, to seize any non-exempt assets that you have, sell those off, and use that money to pay your creditors.

Non-exempt is the key part of that. Most property that people own is exempt, meaning that the trustee is not able to take it. In most cases, parties do not have enough non-exempt property for the trustee to bother seizing anything. However, in a Chapter 7, it is a possibility that some property will be seized, sold off, and used to pay your creditors a portion of what is owed to them. Unlike a Chapter 13 that takes three to five years, a Chapter 7 only takes four to five months. A Chapter 7 is generally considerably cheaper.