Chapter 7 and Chapter 13 are the two main types of personal bankruptcy filings available under the United States Bankruptcy Code, each serving different purposes and catering to distinct financial situations.
Chapter 7 bankruptcy is offered as an opportunity to low-income filers. Eligible debts are discharged in their entirety. And unless the trustee assigned to a filer’s case opts to sell some of the filer’s non-exempt assets to repay their creditors – an exceedingly rare occurrence – the filer will not be required to repay any portion of these eligible balances prior to discharge.
Chapter 13 bankruptcy involves creating a repayment plan. This plan generally runs for three to five years. During this time, debtors reorganize their finances and pay off a portion of their debts via a court-approved plan. Debtors are required to make regular payments to a trustee. That trustee then distributes the funds properly to the creditors named in the plan. Chapter 13 allows debtors to retain their assets while catching up on missed mortgage payments, car loans and other secured debts over the repayment period. Any remaining eligible balances at the end of the process are discharged.
Different debts can be addressed
Because these options work so differently, there are some types of debt that can be included in a Chapter 13 filing, per the terms of a filer’s repayment plan, but that wouldn’t be allowed in a Chapter 7 liquidation plan. Some examples include:
- Debts stemming from non-dischargeable tax obligations and back taxes that have gone unpaid
- Debts due to willful and malicious injury
- Debts that are connected to divorce cases, such as property settlements or debts from a court order during the divorce
Essentially, Chapter 7 would eliminate these debts entirely, which may not be fair to the other party, such as a former spouse who needs that financial support, given that their right to funds has been established by a court order. But that debt may sometimes still be included in a Chapter 13 filing, which can help to ensure that the other party gets what they are owed – it may just take time. As a result, this kind of debt can be restructured via Chapter 13 but not Chapter 7.
Working through the process
Are you considering bankruptcy and looking into your various options? The process can be complicated, but seeking legal guidance can help to better ensure that you know what steps to take and how to get your bankruptcy filing underway.