The Difference Between Chapter 7 and Chapter 13 Bankruptcies

If your debt is getting to be more than you can handle, there is help available. Bankruptcy, a legal way to have many debts forgiven, can put you on the road to financial recovery and provide a fresh start. Filing can keep creditors from harassing you and seizing your possessions, allow debts to be forgiven, and provide a way for you to keep many assets and begin to rebuild your life.

The United States Bankruptcy Code provides several ways for individuals to file bankruptcy. The most common types, Chapter 7 and Chapter 13, have several similarities, differences, advantages and disadvantages. Your individual circumstances will determine which is better for you.

Chapter 7 Bankruptcy: This is the most common form of bankruptcy and will discharge (eliminate) most or all consumer and/or business debts so they do not have to be paid. If your income is too low to pay credit card, medical, and utility bills, or payday or personal loans, this may be your best option. Chapter 7 bankruptcy is over in a few months, and you can begin rebuilding credit quickly. A trustee may liquidate unprotected assets, but there are Ohio bankruptcy exemptions for property that cannot be sold, including clothing, cars, work equipment, and household furnishings. Your possessions may even all be exempt, qualifying you for a "no asset" case.

However, there are some drawbacks with filing for Chapter 7.

These include:

  • Unforgiven debts - Bankruptcy discharges unsecured debts such as credit card balances and medical bills. However, there are some debts, including most taxes and student loans, child support, and alimony payments, which are usually not discharged.
  • Damaged credit score - A Chapter 7 bankruptcy will lower your credit score and remain on your credit report for 10 years. This makes it harder to get a new credit card or be approved for a loan.
  • Possibility of losing your house – If you owe back mortgage payments, your mortgage company may foreclose on your home once your bankruptcy is complete. However, many people keep their houses if they are paid off or if payments are current.
  • You must be eligible - Your income and debt will be subjected to something called a "means test" to determine whether you qualify for Chapter 7. If you are not eligible, filing for Chapter 13 may still be an option.

Chapter 13 Bankruptcy – This is a reorganization plan that allows you to consolidate your payments to avoid fees and fines and repay some or all of your debt affordably over a three- to five-year period. It is best for people who don't qualify for Chapter 7 and who have a steady income, temporary financial problems where they can't meet their debts, and a desire to repay some of the debt in order to keep some assets. Harassing phone calls and letters from your creditors will stop during the repayment time; and if you successfully complete the court-approved payment plan, the debts covered by the plan are discharged. If you have secured debts like a car loan, priority tax debts or child support, you can pay them off through your plan. Some secured loans can be modified down to pay the value of the asset versus the loan amount.

Disadvantages of Chapter 13 bankruptcy include:

  • Time period – You will be under Bankruptcy Court rules and conditions during your repayment plan of three to five years.
  • Problems with credit – The bankruptcy will remain on your credit report and lower your credit score for seven years, and you may have difficulty getting future loans or being approved for a mortgage.

Chapter 7 and Chapter 13 are designed to do different things, and just qualifying for Chapter 7 does not mean it is preferable. For example, Chapter 13 allows to cure loans you are behind on and may allow you to lower loan amounts and interest rates for things like automobile loans. Your circumstances will determine which bankruptcy is better for you.

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