Chapter 7 vs Chapter 13 Bankruptcy

Article bySayantan Mukhopadhyay
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Chapter 7 and Chapter 13

The basic idea of chapter 7 of bankruptcy is that the person needs to surrender its asset to the creditors where a trustee is assigned to manage the property and is required where the person does not own sufficient funds to pay off. On the other hand, chapter 13 of bankruptcy is designed to keep all of your property and debt is discharged either by the restructuring of debt to make it manageable to pay or a waiver of a part of the debt to make the rest manageable to pay.

Most bankruptcies filed in the United States are either Chapter 7 or Chapter 13 bankruptcy cases. Which bankruptcy is the right choice depends on the earned income, assets, debts, and financial goals?

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Chapter 7 vs Chapter 13 Bankruptcy Infographics

Let’s see top differences between chapter 7 vs chapter 13 bankruptcy.

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Key Differences Between Chapter 7 and Chapter 13

  • The primary benefit offered by Chapter 7 is near-guaranteed debt reliefDebt ReliefDebt relief is defined as the process of complete or partial forgiveness of debt taken on by individuals, corporations, or nations, with the goal of stopping or slowing debt growth and providing relief to the debt more. On the other hand, the offerings of Chapter 13 are related to benefits on secured debt. For example, Chapter 13 stops foreclosure proceedings so debtors who have fallen behind on their mortgages can catch up over time without the danger of losing their homes.
  • Everyone isn’t eligible for Chapter 7 bankruptcy. If the income level goes below a certain extent, the case would be eligible. Chapter 13 bankruptcy is much more complex and takes more time than Chapter 7 bankruptcy found that 29% of bankruptcy is Chapter 13 bankruptcy. In contrast, most bankruptcy cases, i.e., around 71%, are Chapter 7 bankruptcy
  • Under Chapter 7 bankruptcy, you can only keep exempt property, which creditors protect under federal law. You must give your non-exempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. In Chapter 13 bankruptcy, you don’t have to give up any property. Instead, you repay your debts out of your income. However, that doesn’t mean that you could keep more property if you had filed bankruptcy under Chapter 7.

Chapter 7 vs Chapter 13 Comparative Table

Basis of comparisonChapter 7Chapter 13
Type of BankruptcyLiquidationReorganization
Eligibility RestrictionsDisposable incomeDisposable IncomeDisposable income is an important mechanism to measure household incomes, and includes all sorts of income such as wages and salaries, retirement income, investment gains. In other words, it is the amount of money left after paying off all the direct more must be low enough to pass the Chapter 7 Means TestCannot have more than $394,7255 of unsecured debt or $1,184,200 of secured debt
How Long Does It Take to Receive a Discharge?Typically 3 to 5 monthsUpon completion of all plan payments (Usually 3 to 5 years)
What Happens to Property in Bankruptcy?Debtors can sell all non-exempt property to pay creditors.Debtors keep all property but must pay unsecured creditors an amount equal to the value of non-exempt assets.
BenefitsAllows debtors to quickly discharge most debts and get a fresh start.Allows debtors to keep their property and catch up on missed mortgage, car, and nondischargeable priority debt payments.
DrawbacksThe trustee can sell the nonexempt property. It doesn’t provide any way to get hold of missed payments.Must make monthly payments to the trustee for 3 to 5 years. May have to pay back a portion of general unsecured debts.
How long does bankruptcy remain?Ten years from the filing date because there is no repayment of any debt.Seven years from the filing date because a portion of the debt is repaid under the discharge plan.
Effect on credit scoreFlag for a Chapter 7 bankruptcy stays on there for ten years.Flag for a Chapter 13 bankruptcy is removed from the debtor’s credit history seven years after filing.
The requirement for bankruptcy proceedings to endThe court must have entered a discharge order.The borrower must have made all payments in accordance with the court-approved plan, after which the court enters the discharge order.

Final Thoughts

The two main bankruptcy options available for people overrun by consumer debt are Chapter 7 and Chapter 13 bankruptcy. Both are also allotted on repayment amounts that the debtors should pay to their creditors.

Since Chapter 7 has stricter rules for re-filing, people who have filed for bankruptcy were forced to opt for Chapter 13 in the last few years. After receiving a Chapter 7 discharge, debtors are barred from receiving another Chapter 7 bankruptcy for eight years, but they would only have to wait four years to file under Chapter 13. If the debtor’s earlier case gets dismissed, there would be no time limit.

Recommended Articles

This has been a guide to Chapter 7 vs. Chapter 13 Bankruptcy. Here we discuss the top differences with infographics and a comparative table. You may also have a look at the following articles for gaining further knowledge in Corporate Finance –