Chapter 7 and Chapter 13 both serve to provide an individual with debt relief. The biggest difference between Chapters 7 and 13 bankruptcies is the repayment of your debt. Chapter 13 involves a court ordered repayment plan where a portion of your debt is repaid to your creditors. Whereas, in a Chapter 7 bankruptcy there is no repayment plan and certain debts are discharged. Another major difference in Chapters 7 and 13 is the bankruptcy process. A Chapter 7 bankruptcy generally takes four to six months to complete. While a Chapter 13 bankruptcy is a longer process and usually takes three to five years to complete.
Debtors who file for Chapter 7 Bankruptcy must go through an eligibility or means test, which is used to determine whether the petitioner’s income is low enough to qualify to file for Chapter 7 bankruptcy. However, there is an exception to the test in which if your debts are primarily business debts (meaning generally over 50%), then you do not have to meet the means test to file for Chapter 7 Bankruptcy. Chapter 7 is a liquidation proceeding in which the debtor can keep or exempt certain property from liquidation and non-exempt property is turned into cash and the proceeds are paid to unsecured creditors pursuant to the priorities stated in the Bankruptcy Code. Individuals that do not qualify for Chapter 7 will most likely file for debt relief under Chapter 13.
Chapter 13 gives individual debtors the opportunity to reorganize their financial affairs while being protected by the bankruptcy court. To qualify for Chapter 13, the individual must have regular income that allows the debtor to fund a repayment plan. Debtors are required to pay in full all priority and secured debts over the course of their Chapter 13 plan.
If you are considering filing for bankruptcy speak to an experienced bankruptcy attorney to determine whether debt relief under Chapter 7 or Chapter 13 is appropriate for you.