Differentiating Between Chapter 7 and Chapter 13 Bankruptcy

19 July 2016
 Categories: , Blog


Most people know that in the event they can no longer meet their financial responsibilities, they can opt to file for bankruptcy to relieve the burden. However, some people do not fully grasp what bankruptcy law entails. The most common misunderstandings come about when people are thinking of Chapter 13 or Chapter 7 bankruptcies. This is why it would be essential to enlist the services of a lawyer to walk you through the different bankruptcy options available to you. Here are some of the different ways that Chapter 13 and Chapter 7 bankruptcies differ.

Bankruptcy Eligibility

Before filing for bankruptcy, one has to be eligible. With Chapter 7 bankruptcy, individuals as well as businesses and corporations would be eligible to file for bankruptcy. With this type of bankruptcy, the individual or the business gets to have some debts eligible for elimination. This option is the most common type of bankruptcy that people will file for. It is allowed for individuals or businesses that are at the median income or below that median income of the state that the debtor resides in to file. To determine if one qualifies for this, a "means test" would have to be conducted. 

With Chapter 13, individuals that are receiving a regular income are those that will be eligible. The Chapter 13 bankruptcy plan gives the debtor a chance to propose a payment plan for the debts owed and, depending on how much they earn, a time period will be set in which the debts can be repaid in installments. Chapter 13 is best suited for people who will be financially capable of paying off the debts while still maintaining their living expenses.

Mode of debt repayment 

One of the major differences between Chapter 13 and Chapter 7 bankruptcies is the mode in which the debts will be repaid. As aforementioned, with Chapter 7 bankruptcy there are some debts that can be simply eliminated from the debtor's record. With Chapter 13, the debtor is required to formulate a payment plan so as to ensure that the creditors get back what is owed to them. This payment plan is court ordered; thus, they make the assumption that you will be able to pay off your debts during a specified period of time. 

With Chapter 7 bankruptcy, the debtor is not required by law to formulate any type of payment plan and that is why some debts can be eliminated. However, this does not mean that all the debt can be eliminated. One would still be liable to pay off debts such as taxes, child support, student loans, criminal fines and the like.