The difference between chapter 7 and chapter 13

One of the most common questions asked by prospective clients at Bailey & Galyen is, “what is the difference between chapter 7 and chapter 13?”

Let’s start with what they have in common:

  • Both are bankruptcy cases filed in federal court
  • Both stop (“stay”) creditor activity upon filing
  • Both allow you to keep certain “exempt” property
  • Both provide a discharge of most debts at the conclusion of the case

Chapter 7 is a “straight” or liquidation bankruptcy. The chapter 7 debtor is one who cannot afford to make payments to his general creditors. It is a relatively short case (typically resolving in four to five months) and requires that the debtor show, among other things, that he lacks an ability to make a meaningful payment to his general creditors. In Chapter 7, there is no payment plan and debtors must surrender non-exempt property (for example, second homes, excess property, etc.) to the trustee who then liquidates such assets (if any) and distributes the money to creditors.

Chapter 13 is a payment plan for three to five years. The debtor in chapter 13 typically:

  • has the ability to make a meaningful (not necessarily full) payment to his general creditors;
  • owes a type of debt that is not dischargeable in chapter 7 (income taxes, for example);
  • needs a payment structure to pay back arrears on a debt that he wishes to keep (a mortgage or car, typically); and/or
  • wants to protect non-exempt “extra” property from creditors and is willing to pay his general creditors to do so.

There are other important differences, but the chapter selection is an important part of an attorney’s job in advising clients considering a bankruptcy.