Consumers typically file one of two types of bankruptcy – chapter 7 or chapter 13. There are important differences between a chapter 7 and a chapter 13. The difference between the chapters include structural and practical differences and present different options for a debtor. The right chapter for each debtor is heavily dependent on the facts of the case. An attorney skilled in consumer bankruptcy is necessary to help a debtor navigate through the decision to file bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 is commonly referred to as liquidation bankruptcy. A chapter 7 can wipe out most general unsecured debts like credit cards and medical bills without requiring the debtor to pay back the debt. A debtor must qualify for a chapter 7 by meeting specific income requirements. For many cases, the debtor will attend a hearing 30 days after filing and will wait a total of 90 days to obtain a discharge.

Chapter 13 Bankruptcy

Chapter 13 is commonly referred to as reorganization. This bankruptcy is for debtors with regular income who have money left over each month to pay back a portion of their debts in a repayment plan. The repayment plan typically lasts for 3-5 years. For many cases, the repayment plan allows a debtor to get current on secured assets (e.g. a home), pay for a vehicle at a lower interest rate, and pay tax debts with little to no interest. 

Typically, for a debtor to file a chapter 13 bankruptcy, there is a specific reason why they would file a chapter 13 versus a chapter 7. Reasons may include too much income, too many assets, behind on secured items, filed a previous chapter 7 within 8 years, and myriad other reasons.

The table below contains some general rules of thumb (as of the date of this posting) regarding the primary differences between chapter 7 and chapter 13 bankruptcy:

Liquidation

Reorganization

No disposable income

Disposable income

8 years between chapter 7

6 years between chapter 7

2 years between chapter 13s

4 years after a chapter 7

No debt limits

$419,275 in unsecured debt

$1,257,850 in secured debt

Non-exempt assets must be sold or purchased back 
from the bankruptcy estate

Debtor pays into the plan the value of 
the non-exempt assets

No provision to become current on secured debts

Provisions to get current on secured 
debts (e.g. home)

No provision to pay back priority debts (e.g. taxes)

Provisions to pay back priority debts with 
little to no interest

Cramdown

No provision to alter a secured debt (e.g. car)

Provisions to alter a secured debt

No provision to remove a junior loan on a 
secured item (e.g. home)

Provisions to remove a junior loan on a 
secured item

3 – 4 months

3 – 5 years

Filing fee $335 plus attorney fees

Filing fee $310 plus attorney fees plus 
payments into the plan

10 years after filing

7 years after filing

Conduct a hearing, collect assets (if any)

Conduct a hearing, collect payments, 
pay creditors

Options

On the surface, a chapter 7 is not always “better” than a chapter 13 nor is a chapter 13 always “better” than a chapter 7. The choice between a chapter 7 and a chapter 13 starts with a debtor having debt that they cannot handle on their own. Starting with the debt, the choice between a chapter 7 and chapter 13 has many factors. As you can see from the chart above, the options are many when a debtor is faced with debt problems. The option that is the best is based on the very specific and individual facts of the debtor’s situation.

A good attorney should first figure out the goals of the debtor. What outcome does the debtor desire? Second, the attorney should gather all the relevant facts on the client’s case. Finally, the attorney and the debtor should work together to go through all the options to come to the best option for that debtor.

An example of how the debtor’s unique fact pattern can dictate the best option, is a situation where the debtor is behind on the house payments. Does the debtor want to keep the home? Does the debtor have enough income to keep the home? Are there other factors that would prevent the debtor from keeping the home? These are just a few of the questions that need to be asked to determine the best option.

When faced with debt problems a debtor has many options to fix those problems. Although the comparison between chapter 7 and chapter 13 is crucial – willingness to fix the problem is the best starting point, as ignoring the problem usually makes the situation worse or eliminates some options. Finding a qualified attorney that works with the debtor for the debtor’s best interests is the most important decision a debtor can make when trying to solve a debt problem. Choose wisely.