How do Chapter 7 and Chapter 13 bankruptcies differ?

How do Chapter 7 and Chapter 13 bankruptcies differ?

On Behalf of | Mar 5, 2024 | Bankruptcy

Chapter 7 and Chapter 13 bankruptcies are two common forms of bankruptcy protection available to those facing financial difficulties. Both chapters offer debt relief. However, they differ in several key areas.

Understanding the distinctions between Chapter 7 and Chapter 13 bankruptcies is helpful for anyone looking to manage overwhelming debt.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is a liquidation bankruptcy and involves the sale of non-exempt assets to repay creditors. This form of bankruptcy is typically available to those with limited income and few assets. In Chapter 7 bankruptcy, a court-appointed trustee oversees the liquidation process, selling non-exempt assets and distributing the proceeds to creditors. Once the process is complete, most remaining unsecured debts, such as credit card balances and medical bills, undergo discharge. This gives the debtor a fresh financial start.

Chapter 13 bankruptcy

Chapter 13 is a reorganization bankruptcy that involves creating a court-approved plan to repay creditors over three to five years. Unlike Chapter 7 bankruptcy, Chapter 13 allows individuals to retain their assets and catch up on missed mortgage or car payments while adhering to the repayment plan. Debtors make regular payments to a trustee. The trustee then distributes the funds to creditors according to the plan’s terms. At the end of the repayment period, remaining eligible debts undergo discharge.

According to the Motley Fool, about 70% of Americans who file for bankruptcy file for Chapter 7. Whether seeking a fresh start through liquidation or a structured repayment plan, exploring bankruptcy options can provide clarity and guidance during difficult times.