Chapter 7 vs Chapter 13: Bankruptcy Laws and What the Courts Will Expect From You

Chapter 7 vs Chapter 13: Bankruptcy Laws and What the Courts Will Expect From You

Sometimes, the massive amount of debt a person amasses can seem impossible to ever pay back. Thankfully, the government has devised a way for people that are suffocating under the burden of debt to get their lives back in order. This is through the legal process of bankruptcy.

However, there are actually two kinds of bankruptcy that individuals might use, and the courts will decide which you fall under. These are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Understanding the difference between the two is extremely important.

What Is Chapter 7 Bankruptcy?

First, you need to understand chapter 7 bankruptcy. This is bankruptcy for individuals in the more traditional sense. At the core of this form of legal bankruptcy is the process of liquidation. This liquidation involves a forfeiture of assets to the bankruptcy court. After the liquidation has taken place, chapter 7 bankruptcy allows an individual to be cleared of their unsecured debt. Secured debt may not be cleared in many cases. Secured debt is backed up with collateral. Unsecured is not.

The Pros and Cons of Chapter 7 Bankruptcy

There are some significant benefits to obtaining a chapter 7 bankruptcy. The biggest of them is that it will permanently remove your unsecured debt. This would be the overwhelming reason you may want to obtain this kind of bankruptcy in court with the help of a bankruptcy attorney. The downside of course is that a good deal of your assets will have to be liquidated. Thankfully, there will be some exclusions for things like your primary residence, your primary vehicle, and certain personal possessions.

The Role of a Bankruptcy Lawyer

While deciding between chapter 7 and chapter 13 bankruptcy, you most likely need the assistance of a bankruptcy attorney to help you make the best choice and guide you through the process. If there are certain kinds of assets you want to protect, a skilled attorney can help you do just that. Even simply being approved for a chapter 7 bankruptcy is difficult. Without legal help, you may end up being denied after failing to meet the requirements. Overall, you need the knowledge and skill set a bankruptcy lawyer brings to the table.

What Is Chapter 13 Bankruptcy?

The second kind of legal bankruptcy process for individuals you may have to go through is chapter 13 bankruptcy. Unlike chapter 7, chapter 13 bankruptcy is not a straight liquidation of assets. Instead, it can be thought of more as a reorganization of a person's debt by the court so it can be more easily paid over a period of time. A person is often forced to use the chapter 13 bankruptcy process after being denied to use Chapter 7 for failing the bankruptcy means test. This test compares a person's income against the median income of their state for a family of the same size.

The Pros and Cons of Chapter 13 Bankruptcy

The main benefit provided by chapter 13 bankruptcy is that a person does not have to liquidate their assets. If you have a lot of property you want to continue holding on to, chapter 13 may be the right option for you. Instead of a liquidation, you are required to continue paying back your creditors in a reorganized plan that is supposed to be more feasible for you to pay off. Having to continue making payments on your debt is the biggest downside for chapter 13 versus a chapter 7 bankruptcy.

Whether you prefer chapter 7 or chapter 13 bankruptcy depends on different factors. Are you more concerned with having your debt permanently eliminated? In that case, chapter 7 is preferable. Are you more concerned with holding on to all your assets? If you are, chapter 13 bankruptcy is probably the best option. Discuss the possibilities with an attorney with plenty of experience in bankruptcy cases.


Anita is a freelance writer from Denver, CO. She studied at Colorado State University and now enjoys writing about health, business, and family. A mother of two wonderful children, she loves traveling with her family whenever she isn’t writing. You can find her on Twitter @anitaginsburg.
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