Navigating financial difficulties can be overwhelming, but understanding the distinctions between Chapter 7 and Chapter 13 bankruptcies can empower individuals facing these challenges. These two chapters, under the United States Bankruptcy Code, offer distinct approaches to debt resolution.
Each chapter serves a unique purpose, catering to different financial situations and priorities.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is a “liquidation” bankruptcy. It provides individuals with a fresh financial start by discharging most unsecured debts. This process involves a trustee liquidating non-exempt assets to repay creditors. The entire procedure is relatively swift and typically concludes within a few months. However, eligibility for Chapter 7 is subject to a means test. This helps ensure that those with sufficient income to repay their debts do not abuse the system.
Chapter 13 bankruptcy
On the other hand, Chapter 13 bankruptcy operates under a reorganization model. It allows individuals with a regular income to create a feasible repayment plan over three to five years. This plan consolidates debts, making it more manageable for the debtor while ensuring that creditors receive some repayment. Unlike Chapter 7, individuals can retain their assets under Chapter 13. This makes it an attractive option for those who want to protect their property.
The Motley Fool reports that the majority of Americans who file for bankruptcy do so through a Chapter 7 filing. About 70% of all filers file for Chapter 7. The decision between the two chapters often depends on the debtor’s financial situation, goals and the type of assets he or she wants to protect.