What Is Chapter 7 Bankruptcy VS Chapter 13?

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

The difference between chapter 7 and chapter 13 bankruptcy is that chapter 7 is a liquidation bankruptcy, while chapter 13 is a restructuring bankruptcy. 

In chapter 7, your nonexempt assets are seized and sold to pay your creditors.

In chapter 13, you keep your assets but must create a debt repayment plan.

Is Chapter 13 Bankruptcy Better Than Chapter 7

Chapter 13 bankruptcy is not better than chapter 7, but it does have some advantages. 

You keep most of your assets under chapter 13, however you are still on the hook for repaying the majority of your debt. 

In chapter 7 you may lose your assets but the proceeds will go to your creditors to reduce the amount you owe.

Should I File Chapter 7 Or Chapter 13 Bankruptcy

Chapter 13 and chapter 7 bankruptcies are better for different circumstances. 

If your debts are completely unpayable, then chapter 7 is likely the better debt relief option.

If your debts are almost payable but you need more time and/or better terms, then you should file chapter 13 instead.

What Is Chapter 7 Bankruptcy VS Chapter 13 FAQs

Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors. 
There are three common types of bankruptcy known as “chapters” in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.
Chapter 7 is known as a liquidation bankruptcy. Most of your property will be sold to pay off your debts, then whatever debt in excess of the value of your liquidated property will be cleared.
Chapter 13 bankruptcy is a reorganization bankruptcy. With Chapter 13, you are able to keep your personal property and reorganize your debts to a payment schedule that enables you to pay back your creditors over time (often 3 to 5 years).

What is Bankruptcy?

What Does It Mean to File for Bankruptcy?

Bankruptcy is a legal proceeding in which a debtor declares their inability to pay back their creditors. 

The general idea behind declaring bankruptcy is that it allows debtors a “fresh start”while offering creditors a way to receive some or all of their owed payment. 

Although some debts are forgiven, filing for bankruptcy affects the debtor’s creditworthiness. 

When filing for bankruptcy, secured debts are usually paid for by the asset “securing”the debt, while many types of unsecured debts can be renegotiated. 

What Is Bankruptcy? The Three Chapters of Bankruptcy

There are three common types of bankruptcy known as “chapters”in the U.S. bankruptcy code, Ch. 7, Ch. 11, and Ch. 13, each with varying criteria and consequences.

Ch. 7 Bankruptcy

 The most common type of bankruptcy is Chapter 7. 

Chapter 7 bankruptcy is known as “straight”or “liquidation”bankruptcy.

It is designed to give a “fresh start”by discharging debts that cannot be repaid through the liquidation of the debtor’s assets. 

Upon filing Chapter 7, a trustee is appointed to sell the debtor’s non-exempt assets and distribute the proceeds to creditors. 

For individuals, the law exempts certain assets such as retirement funds, primary residence, tools for their trade, and personal vehicles from being liquidated to pay back creditors. 

This pays back creditors some of what they are owed and protects individuals from having all of their livelihood taken from them. 

Ch. 11 Bankruptcy

Chapter 11 bankruptcy is primarily for companies, allowing them a break on paying their debts in order to restructure, come up with new terms for paying their creditors, and become profitable again. 

This allows companies to stay afloat while coming up with a new way to pay back creditors. 

Chapter 11 is the most complex and expensive form of a bankruptcy proceeding and should therefore be considered after other options have been explored. 

Ch. 13 Bankruptcy

Chapter 13 bankruptcy, known as a “Debtor in Possession”Bankruptcy, stands in contrast with Chapter 7 because it allows the individuals to keep from liquidating their property. 

Chapter 13 creates a new, more affordable payment plan for the debtor to repay creditors, usually lasting 3 to 5 years. 

Once the payment plan is finished, the remaining unsecured debts are discharged. 

Bankruptcy FAQs: