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What's the difference between Chapter 7 and Chapter 13 bankruptcy?

One of the key questions that many people have when their debt hits critical mass is "what type of bankruptcy should I file?" There are many different types of bankruptcy, but two of the most common filings are Chapter 7 bankruptcy and Chapter 13 bankruptcy. So what is the difference between these two types of bankruptcy, and what do people need to know when filing either of them?

First and foremost, it is important to note that if you surpass a certain income threshold, you will no longer be eligible for Chapter 7 bankruptcy. In such a case, you will likely file for Chapter 13 bankruptcy.

There are varying rules regarding these two bankruptcies beyond the income threshold:

  • Loans related to your car or home: Under Chapter 7, you will probably be forced to give up the car or home to appease your creditors. This isn't a guarantee, mind you, as the value of the home or car plays a role in whether you have to give up the asset. A Chapter 13 filing, meanwhile, will give you a good chance of retaining your home or car.
  • Student loan, alimony or child support debt: This is a constant for Chapter 7 and 13 filings, with one tiny difference. Under Chapter 7, these debts are secured and can't be discharged through the bankruptcy process. Under Chapter 13, they also won't be discharged, but you will be given a fresh chance to pay them off (though if you don't fulfill this by the end of the bankruptcy, you are still responsible for the remainder).
  • Refiling for bankruptcy: If you have a prior Chapter 7 on the books, you may be able to file Chapter 7 again, though it depends on the timetable between your filings. (but a previous Chapter 13 filing still allows for a future Chapter 7 filing). If you have a prior Chapter 13 filing, you can refile for Chapter 13.

Source: FindLaw, "Chapter 7 vs. Chapter 13 Bankruptcy," Accessed Sept. 19, 2014

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