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The Difference Between Chapter 7 and Chapter 13

Law Office of Robert L. Firth April 9, 2024

For many individuals, bankruptcy is a pathway that leads to relief — a legal process that can provide a fresh start in times of severe debt.  

The journey toward debt relief hinges on pivotal choices, with two of the most common roads being Chapter 7 and Chapter 13 of the United States Bankruptcy Code. Understanding the ins and outs of each chapter is key for those seeking to chart a course toward financial recovery. 

If you find yourself at this crossroads, this comprehensive guide will illuminate the critical differences between Chapter 7 and Chapter 13 bankruptcy, helping you make an informed decision that aligns with your unique financial circumstances. 

How Chapter 7 Bankruptcy Works

At the heart of Chapter 7 is a liquidation process designed to discharge most unsecured debts and provide a relatively swift resolution. Here's what you need to know: 

Who Can File for Chapter 7 

To file for Chapter 7 bankruptcy, individuals must meet specific eligibility criteria, primarily determined by a means test. This test compares the filer's income with the median income for a similarly sized household in their state. If the individual's income falls below the median, they may qualify for Chapter 7.

Additionally, filers must not have had a bankruptcy discharge in the previous eight years under Chapter 7. It’s important for those considering this route to consult with an experienced bankruptcy attorney or a financial advisor to assess their qualifications and understand the implications thoroughly. 

The Liquidation Process 

Once you file for Chapter 7, a trustee is appointed to sell your non-exempt assets to pay off your creditors. Non-exempt assets may include luxury items or secondary homes. However, most individuals who file for Chapter 7 are typically able to keep their primary residence and necessary personal possessions. 

The Discharge 

If the process is completed, the bankruptcy court discharges most unsecured debts, relieving you from personal liability for debts such as credit cards, medical bills, and personal loans. This discharge is a significant step toward a fresh financial start. 

How Chapter 13 Bankruptcy Works 

Chapter 13 bankruptcy, by contrast, involves the reorganization of debts under a court-approved repayment plan. It is typically sought by individuals who have a regular income and want to keep their secured assets, such as a home or car, through more structured repayment. 

Who Can File for Chapter 13 

To file under Chapter 13, your unsecured debts must be below a statutory limit set by bankruptcy law, which is periodically updated. Similarly, secured debts—those linked to physical assets like property or cars—must also fall below a certain cap.  

Unlike Chapter 7, there is no means test for Chapter 13; however, proof of consistent income is crucial since you'll need to meet the regular payments outlined in the repayment plan. Additionally, individuals must not have a prior bankruptcy petition dismissed within the preceding 180 days due to certain failures, such as non-appearance in court, or have had a bankruptcy discharge in the previous six years under Chapter 13. Engaging with a bankruptcy attorney to evaluate eligibility for Chapter 13 can significantly aid in navigating these requirements. 

Creating a Repayment Plan 

Under Chapter 13, your attorney works with you to create a 3- to 5-year repayment plan. This plan is founded on your disposable income, with the aim of paying off at least some of your debt, but not necessarily all of it. 

Homestead and Car Payments 

The advantage of Chapter 13 is that it allows you to catch up on past-due mortgage payments or car loans over the life of the plan, so you can avoid foreclosure or repossession. 

The Court's Approval 

For the plan to take effect, it must be approved by the bankruptcy court. Once the payments are completed, any remaining unsecured debts, such as credit card balances and medical bills, may be discharged. 

Key Differences 

Understanding the key differences between Chapter 7 and Chapter 13 bankruptcy is critical for making an informed decision on which route might be best suited to your financial situation.  

One of the most significant distinctions lies in the handling of assets. Chapter 7 may lead to the loss of certain non-exempt properties, whereas Chapter 13 typically allows individuals to keep their assets, provided they adhere to the agreed-upon repayment schedule.  

Additionally, the tenor of commitment is markedly different. Chapter 7 proceedings can often conclude within a few months, but Chapter 13 requires a long-term commitment of 3 to 5 years of repayments. 

Another key difference is in the types of debts each can effectively manage. While Chapter 7 can swiftly discharge most unsecured debts, it might not be the ideal solution for those looking to stop foreclosure of their home or the repossession of other assets. Chapter 13's structure is beneficial for those who are behind on secured debts and offers a mechanism to catch up on payments while still addressing unsecured debts. 

In essence, your choice between Chapter 7 and Chapter 13 bankruptcy should be informed by your financial objectives, your income level, and what you hope to achieve through the bankruptcy process, whether it's a rapid discharge of debts or a structured plan to retain assets and manage payments more effectively. 

Which Chapter Is Right for You? 

Choosing between Chapter 7 and Chapter 13 is a decision that requires careful consideration of your financial picture. It’s imperative to consult with a skilled bankruptcy attorney who can evaluate your situation and guide you toward the most advantageous path. 

Are There Alternatives to Bankruptcy? 

Before considering bankruptcy, it's useful to explore all the available alternatives, which may offer less drastic ways to handle overwhelming debt. Here are a few options to consider: 

  • Debt Settlement: Negotiating directly with creditors to settle a debt for less than the amount owed. This can be effective for unsecured debts like credit card balances. 

  • Debt Management Plan (DMP): Engaging a credit counseling agency to create a plan to pay off your debts. The agency can negotiate lower interest rates and consolidate debts into a single monthly payment. 

  • Debt Consolidation: Taking out a new loan to pay off multiple debts. Ideally, the consolidation loan will offer a lower interest rate than your current debts, reducing your monthly payments. 

  • Credit Counseling: Seeking guidance from a nonprofit credit counseling agency to create a budget and potentially enroll in a DMP. 

  • Asset Liquidation: Independently selling non-essential assets to pay off debts. This option requires careful consideration to avoid jeopardizing your financial situation further. 

Each of these alternatives comes with its own set of benefits and drawbacks, and some might have implications for your credit score. Thoroughly researching and possibly consulting with a financial advisor can help determine the most viable option for your specific circumstances. 

Contact Our California Firm

Our California law firm, the Law Office of Robert L. Firth, specializes in bankruptcy law and serves clients throughout Palm Springs, Palm Desert, Desert Hot Springs, Rancho Mirage, and the Coachella Valley.  

If you’re at a financial crossroads and considering bankruptcy, our experienced lawyer is here to provide the guidance you need to make sound decisions for your future.  

Don't walk this path alone—reach out to us for the compassionate and skilled legal support you deserve during these difficult times.