What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?


Quick Answer

Chapter 7 is described as basic bankruptcy in that it permits the liquidation of all debts, according to Cornell University Law School. Chapter 13 allows individuals to enter a payment plan to pay off their debts over time.

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Full Answer

Individuals may seek Chapter 7 bankruptcy only if their income lies below their state's median income. If a person's net monthly income falls between $100 and $166, courts assess whether the debtor should file under Chapter 7 or Chapter 13, states the American Bar Association. For net monthly incomes above $166, the debtor must file under Chapter 13.

Chapter 13 allows debtors to keep their property as long as creditors are paid off in during the repayment period, usually three to five years, states Cornell University Law School. The law prohibits certain debts from being discharged in bankruptcy, but Chapter 13 allows debtors to request a payment plan for these debts. Chapter 13 applies only to individuals. The law sets out debt limits to be eligible for Chapter 13. Individuals should have less than $307,675 in unsecured debts, such as personal loans and credit cards, and under $922,975 in secured debts, such as mortgages and car loans.

Under both Chapter 7 and Chapter 13 bankruptcy, certain debts may not be discharged, including most tax debts, alimony, child support, property settlements after a divorce, most student loans, fraud debts, and debts resulting from drinking and driving, explains Cornell University Law School.

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