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The Difference Between Chapter 7 and Chapter 13

Kinnaird Law Firm Nov. 22, 2023

Bankruptcy word represented by wooden letter tilesBankruptcy can provide you with a financial reset when your life becomes unbearable due to overwhelming debt. However, filing for bankruptcy is not something that should be taken lightly, as your future and the future of your family is at stake. One of the first questions you may have when filing for bankruptcy is: “Which type of bankruptcy is best for me?” 

In the United States, there are two types of bankruptcies available to individuals: Chapter 7 and Chapter 13. Many people do not understand their distinct differences, which may cause them to feel anxious when trying to figure out which one is more suitable for their situation. Our attorneys at Kinnaird Law Firm can explain your options and guide you in making informed decisions when filing for bankruptcy. With an office in Colorado Springs, Colorado, our law firm also serves clients throughout Douglas County and El Paso County.  

What Is Chapter 7 vs. Chapter 13 Bankruptcy?

Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy” because the debtor’s non-exempt assets have to be sold (liquidated) in exchange for absolving their obligation to repay most or all of the unsecured debts.  

Chapter 13 bankruptcy, on the other hand, is known as the repayment plan bankruptcy. Filing for bankruptcy under Chapter 13 allows the debtor to restructure their debts and pay them off over a period that lasts from three to five years.  

What Is the Difference Between Chapter 7 and 13 Bankruptcy?

While both Chapter 7 and Chapter 13 bankruptcies offer debt relief, there are several distinct differences between these types of bankruptcy, including: 

  1. Eligibility requirements. Under the law, you cannot file for Chapter 7 bankruptcy if you do not pass the means test. As the name implies, the means test determines whether or not you have the means to repay your creditors. This test compares your income to your state’s income limits for households of the same size as yours. You are eligible to file for Chapter 7 bankruptcy if less than eight years passed after your last filing under Chapter 7. If you filed for Chapter 13 bankruptcy in the past, you must wait at least six years to file under Chapter 7. While you are not required to pass the means test to be eligible for Chapter 13 bankruptcy, you must demonstrate that you have a regular monthly income to afford monthly payments to repay your creditors over a three- or five-year period. You must also prove that you have less than $2,750,000 in total debt to qualify for bankruptcy under Chapter 13.  

  1. Discharge of debt. In Chapter 7 bankruptcy, you can eliminate your legal obligation to repay unsecured debt, which is known as “discharge.” The discharge of unsecured debt typically occurs at the end of the Chapter 7 bankruptcy case. If there are any debts that cannot be discharged (secured debts, taxes, student loans, and certain others), you will still be responsible for paying back these debts even after you file under Chapter 7. In Chapter 13 bankruptcy, you propose a plan to repay your creditors over a period of three to five years. However, it might still be possible to discharge some debts once you complete the repayment plan, but there are no guarantees.  

  1. The risk of losing assets. Whether you file for bankruptcy under Chapter 7 or Chapter 13, you must list all of your assets and property in the bankruptcy petition. The list may include real estate, automobiles, investments, personal property, and others. Then, all of your assets will be categorized into exempt and non-exempt. While your exempt assets (assets protected by exemptions) are typically not affected by your bankruptcy filing, you risk losing your non-exempt assets. The trustee assigned to your case will typically liquidate your non-exempt assets to repay your creditors. In Chapter 13 bankruptcy, you will not lose any of your assets because this type of bankruptcy involves reorganizing your debt and paying back your creditors over a period of three to five years.  

Are you having a hard time making both ends meet and want to get your finances under control? Consider contacting our bankruptcy attorneys at Kinnaird Law Firm to discuss whether filing for bankruptcy would be the right answer in your particular situation.  

What Are the Advantages of Filing Under Chapter 7 vs. Chapter 13? 

While there are many differences between Chapter 7 and Chapter 13 bankruptcy, each of these options has its own advantages. Here are some of the advantages of filing under Chapter 7: 

  • The process is typically faster and more straightforward. 

  • You can discharge your unsecured debts. 

  • You do not have to wait years to be relieved of your obligation to pay discharged debt. 

Some of the advantages of filing under Chapter 13 include the following: 

  • You can stop foreclosure and repossession by making up missed payments. 

  • You can keep all of your assets. 

  • Chapter 13 stays on your credit for seven years while Chapter 7 stays for 10 years. 

  • You can file under Chapter 13 if you do not pass the means test to file under Chapter 7. 

Ultimately, it is best to speak with a knowledgeable attorney who can help you decide which option is right for you based on your unique financial situation.  

Guiding Colorado Residents With Professional Support

At Kinnaird Law Firm, we understand that this may be a difficult time for you. Our attorneys are ready to help you understand your options and make a plan for you to move forward. It is our job to provide you with the guidance and support you need and help ease tension and confusion when filing for bankruptcy. Contact our office today to request a case review