Chapter 7 in chapter 13 are the two main types of bankruptcy for individuals. If you, as an individual, are considering filing bankruptcy one of these two will likely be the one you use. Now, which one you use depends on your goals and your current situation; probably much more on your current situation than your goals.
Chapter 7 bankruptcy is also known as “liquidation” and is where all, or most all of your debts are wiped clean and you essentially start from scratch. Of course, there are exceptions to this, such as things that cannot be discharged through chapter 7 bankruptcy including student loans, government debts, taxes, and a few others, but of the two options, chapter 7 is the one that most closely resembles the “clean slate” approach.
During the chapter 7 bankruptcy you have to disclose all of your assets in the trustee assigned to your case decides what to do with those assets, whether it be repay your creditors or, if you don’t have enough assets, to simply wipe your debts clean and let you keep everything.
A chapter 7 bankruptcy is really designed for those or looking for a completely fresh start and do not have many assets at all or much income in order to repay their creditors.
Chapter 13 bankruptcy
Chapter 13 bankruptcy, on the other hand, is essentially a debt repayment plan where you’re not obligated to repay all of the debts UL, but the trustee works with youth come up with a suitable dollar amount that you can afford to repay on a regular monthly plan.
This type of bankruptcy is really geared toward those who have enough income or assets to not qualify for chapter 7 bankruptcy; either that, or they qualify for chapter 7, but don’t want to surrender all of their assets as a result. Income is a large determining factor in choosing the right form of bankruptcy; if you have enough disposable income you may not qualify for chapter 7 bankruptcy and will either have to go with chapter 13 or not file altogether.
A chapter 13 bankruptcy you also disclose all your assets and income, however, that information is used by the trustee in order to design a debt repayment plan that will compensate your creditors for some of the debt you owe them. Now, you may be thinking, why would anyone choose chapter 13 bankruptcy if they have to repay their debts anyway, why not just repay them on your own? Some people find themselves in a situation where they may still have a decent job, a home, a car, and don’t want to lose any of those assets, but for whatever reason, find themselves much too far in debt to be able to repay the full amount in a reasonable timeframe.
For example, if you recently had a business go under, you may be saddled with hundreds of thousands of dollars in debt and, even though you were able to find a decent paying job afterwards, there’s just no way you could pay back that amount money in any reasonable amount of time. In such a case, you’d work with the bankruptcy court to come up with a payment plan in which you would repay some percentage of the full amount over the course of several years, or whatever is deemed reasonable considering your income and assets.
So to summarize, the basic difference between chapter 13 in chapter 7 bankruptcy is that in chapter 13 bankruptcy you repay a fraction of what you owe in order to be able to keep your income and assets, whereas chapter 7 bankruptcy allows you to almost entirely wiped the slate clean in the event you don’t have any income or assets to protect. It may help to think about chapter 7 bankruptcy is a total liquidation and chapter 13 bankruptcy as a settlement of your debts for much less than you actually owe.
