What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?

October 5, 2016
Arnold Wadsworth Coggins

When experiencing financial difficulties that are insurmountable based on the level of debt and income, bankruptcy can be an effective solution. One of the first things that one must do is decide which type of bankruptcy is right for their particular situation. The two options for most people are Chapter 7 bankruptcy and Chapter 13 bankruptcy, so take some time to learn about the differences between each of them.

Income Restrictions

One of the main distinctions between these two types of bankruptcy is the income restrictions. Depending on how much money you make, you may only have one option:

  • Chapter 7 – Chapter 7 bankruptcy is reserved for those who have income below a certain threshold based on the number of people living in the house. A single person in Utah, for example, must make $49,347 per year or less to qualify for this bankruptcy option.
  • Chapter 13 – Those with higher income levels can qualify for either option based on other factors, including their ability to repay the debt with restructuring.

Impact on Mortgages and Car Loans

Mortgages and car loans are typically going to be the two biggest debts that a person going through bankruptcy has. What happens to these two debts will depend largely on what type of bankruptcy you choose:

  • Chapter 7 – Most people who choose Chapter 7 will have to give their house or vehicle back to their creditor. If you want to keep these assets, arrangements with the creditor to pay the wholesale value of the item must be made.
  • Chapter 13 – Chapter 13 makes it much easier for people to retain ownership of these assets as long as they will be able to afford the payments after the bankruptcy has been discharged.

Contacting Co-Debtors

If you have debt that has a co-signer, there are some important differences between Chapter 7 and Chapter 13 bankruptcy:

  • Chapter 7 – Creditors can attempt to collect the debt from the co-debtor before, during, and after the bankruptcy has been completed.
  • Chapter 13 – Creditors may not contact the co-debtor during the bankruptcy process. They may, however, attempt to collect any discharged debt from the other party after the bankruptcy has been completed.

Elimination Vs. Restructuring of Debt

For many people, the most important difference between these two types of bankruptcy is going to be concerning what happens to the debt itself.

  • Chapter 7 – Chapter 7 bankruptcy is set up to eliminate unsecured debts (credit cards, medical bills, etc).
  • Chapter 13 – In general, Chapter 13 is going to restructure the debt rather than eliminate it. Restructuring can include stopping interest, extending the life of the debt, and perhaps consolidating certain types of debt.

Get Help with Your Bankruptcy

Making the right decisions before and during your bankruptcy can mean the difference between emerging on strong financial footing, and having your case rejected by the courts. Contact us to schedule a consultation and learn how we can help you throughout the bankruptcy process.