What is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Key Takeaways
  • Filing for bankruptcy will stop creditor actions including foreclosure, repossession, or wage garnishments.
  • Chapter 7 can dissolve debts within six months where Chapter 13 can take up to five years.
  • You must complete two bankruptcy courses and meet with creditors to discuss your debts in either bankruptcy petition.
  • Chapter 7 remains on your credit file for 10 years, where Chapter 13 only stays for seven.

The phone rings. It’s a number you do not recognize. It’s probably another debt collection agency calling to demand payment. 

Why answer when you do not have the money to bring the account current? 

It is not good to avoid creditors because it could trigger lawsuits, which will make matters even worse. And yet you continue to ignore the collection calls, emails, and letters.  

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You begin to wonder if bankruptcy might be your best option. Understanding the key differences between chapter 7 and chapter 13 bankruptcy will help you decide if filing a petition is the right choice.  

A Comparison Between Chapter 7 and Chapter 13 Bankruptcy

Event Chapter 7 Bankruptcy Chapter 13 Bankruptcy
How long it takes after filing 3 to 6 months 3 to 5 years
Credit counseling required Yes Yes
Budget counseling required Yes Yes
Creditor meeting Yes Yes
Repayment of debts required? No Yes… partial
Creditors stay stops collections Yes Yes
Time restrictions      7 to 7 – 8 yrs; 7 to 13 – 4 yrs 13 to 13 – 2 yrs; 13 to 7 – 6 yrs
The improper filing wait period 180 days or longer 180 days or longer
Length of time on the credit file 10 years 7 years

https://www.alllaw.com/articles/nolo/bankruptcy/how-often-file.html

What is Chapter 7? 

Filing for chapter 7 bankruptcy, offers qualified applicants a fresh start. The courts will discharge all qualified unsecured debts, which can include credit card and medical debts, personal loans, or judgments. It will not typically eliminate tax liens, student loans, or back child support. 

After filing, creditors may no longer continue collection efforts, and you may keep future wages. It takes approximately four months to complete the process.  

Chapter 7 bankruptcy is best suited for consumers with large amounts of unsecured debt with limited assets and income. You may retain assets falling under the exemptions allowed in your state, which typically include your primary residence, a vehicle, and equipment required for work.   

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What is Chapter 13?

Chapter 13 Bankruptcy requires repayment to creditors through a settlement plan. A court trustee oversees the process, which will last between three and five years. Once you complete the plan, you receive a discharge on any remaining debt balances.   

After filing a petition, a creditor’s stay prevents further collection efforts. The filing also temporarily stops wage garnishments, foreclosure, and lawsuits. You begin making payments after the judge approves the debt restructuring plan. 

The trustee places debts in three categories; mandatory, secured and unsecured accounts. Mandatory bills like court fees, delinquent taxes, and child support receive the first payments. If you keep the asset, you will also pay secured debts in full. Unsecured debts receive partial payments based on your income and ability to pay.

Once you enter a chapter 13, you cannot stop payments. If financial circumstances decline, you must petition the court, and the trustee can adjust the plan or redirect the case to chapter 7 if you qualify. During repayment, the trustee must approve financial activities such as a major purchase or an application for new credit. 

Chapter 13 is best suited for consumers who have reliable income but are unable to maintain payments on the current debt. It can also prevent the loss of a home in foreclosure.  

Qualifying for Chapter 7 

Changes in the bankruptcy law set stricter limits on who can qualify for a chapter 7 bankruptcy forcing many seeking debt relief into chapter 13. 

Chapter 7 bankruptcy requires a means test, which compares existing debt balances with income. When income falls below the mean for your state of residence and family size, it is not necessary to complete an additional financial review. 

Individual Versus Spousal Filing

You may file either an individual or a joint petition. Filing an individual petition will not dissolve joint debt, and your tax filing status does not impact your ability to file for bankruptcy as an individual. 

Credit and Budget Counseling

Both chapters 7 and 13 bankruptcies include mandatory counseling through a court-approved provider. The goal of credit counseling is to determine if bankruptcy is the best course of action for your circumstances. You must receive a certificate of completion of credit counseling from a court approved credit counseling agency before you file. 

It is also necessary to complete budget counseling before the discharge of debt. Budget education teaches you how to manage your income, expenses and credit to prevent debt issues in the future. 

The Cost of Filing Bankruptcy

Chapter 7 bankruptcy costs include the cost of credit and budget counseling, court filing fees, and attorney costs.

Chapter 13 bankruptcy includes similar charges. However, you must also pay for court oversight during repayment, which significantly adds to the cost. 

Items Required to File for Bankruptcy

  • Certificate for the completion of credit counseling 
  • The bankruptcy petition
  • A list of all debts, even if you plan to continue repayment
  • A complete list of assets (courts may consider any asset not included as fraud)
  • Retirement, investment, education, and bank account statements
  • Real and personal property
  • Proof of income from all sources
  • Tax returns for the past year and any filings made while in bankruptcy
  • Documentation of monthly expenses and list of creditors
  • Statement of financial affairs
  • Copies of any open contracts such as a lease or business arrangement

What Happens After You File?

You have 14 days to perfect the application. You must make corrections and supply information requested by the courts. Failure to meet the deadlines can result in a decline of the petition. In this case, you often must wait 180 days or more to refile a petition.  

Impact on Your Credit

Filing bankruptcy has a long-term impact on your credit report and score. After bankruptcy, credit offers will often come with high interest rates, annual fees, and other costs. You might need to use secured credit, an authorized user, or co-signed debt to rebuild your credit file and score

Many lenders will not consider a new application for credit for at least three to five years after the bankruptcy.

A chapter 13 bankruptcy remains on your credit report for seven years, and chapter 7 typically remains for 10. 

Permanent Effects of Bankruptcy

Most people will see little or no permanent impact of filing bankruptcy. However, you must always affirm that you filed bankruptcy when asked on an application for employment, or government service. Bankruptcy can also disqualify you for certain sensitive jobs or security clearances. 

Final Thoughts 

Filing bankruptcy provides financial relief and does not require you to pay all existing debts in full. However, there is a long-term effect on your finances. Failing to address the underlying problems that created the unmanageable debt, could lead to more credit problems down the road. 

FAQs
  • Which is the best Chapter 7 or Chapter 13?

    In terms of out-of-pocket costs, Chapter 7 will discharge debts without requiring you to repay creditors and could be final within six months. However, you must qualify to file Chapter 7. Chapter 13, on  the other hand, allows you to protect more property, giving you time to catch up delinquent payments. It also requires partial payments to creditors for up to five years. 

  • What is the difference between Chapter 7 and Chapter 13 bankruptcy?

     The key difference between Chapter 7 and Chapter 13 is the repayment component. In Chapter 7, you do not have to repay creditors. But the bankruptcy trustee will sell any non-exempt assets to satisfy some of your debts. Chapter 13, often called bankruptcy reorganization, gives you five years to catch up payments on secured debts, and make payments on unsecured obligations before a judge will discharge any remaining qualified debts.

  • WIll I qualify for Chapter 7?

    To file Chapter 7, you must earn less than the median income in your state or pass a means test. The other caveat is that if you own non-exempt assets you will have to sell them for debt repayment before receiving a discharge, potentially making Chapter 13 the better option, even if you qualify.