Facing bankruptcy is never easy. The decision to file for bankruptcy can help you get a fresh financial start when debts become overbearing, but it will also have lasting effects on your credit, assets, and life.


The best thing you can do as you approach this decision is understand the differences between the types of bankruptcy that are available to you. The more informed you are, the more confidently you can move forward.


When you turn to bankruptcy, the two most popular legal options available for individuals are Chapter 7 and Chapter 13 bankruptcy. Each is designed to help alleviate overwhelming debts and financial burdens, but there are also very different benefits and uses for the two types.


Here’s a guide to the differences between Chapter 7 bankruptcy and Chapter 13 bankruptcy, and circumstances in which each might be used.


Basics of Chapter 7 Bankruptcy


Chapter 7 bankruptcy is also known as liquidation. This is the standard bankruptcy option for those with a lot of debt on a limited income, especially for people who have already sold off their property to repay debts.


Some of the benefits of Chapter 7 bankruptcy include:


  • -All debts are discharged. You no longer have to pay your owed debts (with the exception of student loans, which usually cannot be discharged). You get a new, debt-free start.

  • -It’s fast-acting. Chapter 7 filing is no doubt the faster option when it comes to bankruptcy, taking around four to six months to complete.


  • -A stay will be set against debt collectors. That means that debt collectors will no longer be able to garnish your wages, seek payment from you, or take other action against you for current debts owed.


While some of the downsides include:


  • -You will lose possession of your assets. A trustee will be placed in charge of your assets to use them to pay back as        much of your debts as possible. That means you may lose your home, property, car, and other personal property, although most states will allow you to keep necessities such as clothing, furniture, and transportation and equipment used for work.


  • -Your credit will be significantly impacted. Your bankruptcy can stay on your credit for ten years, which can raise interest  rates on future loans, and make things like getting credit cards and finding housing more difficult.



Basics of Chapter 13 Bankruptcy


Chapter 13 bankruptcy, aka wage earner’s bankruptcy, differs from Chapter 7 because you may be able to retain your property and assets.


To use Chapter 13 bankruptcy, you must earn a high enough income to make repayment of some of your debts possible, and you must create and follow a court-approved repayment plan for a period of several years.


Some of the benefits of Chapter 13 bankruptcy include:


  • -Retaining assets. When using Chapter 13 bankruptcy, you make a payment plan with the court, which allows you to keep some of your assets. The payment plan usually lasts 3–5 years and must be strictly adhered to, but when it is followed, you do not have to forfeit your home, property, and other assets.


  • -Alleviating debt. Although it does not completely eliminate debts like Chapter 7, after the period of repayment, Chapter 13 bankruptcy may allow you to discharge remaining debts.


  • -Foreclosure and debt collectors are halted. If action is being taken against you and your property for debts owed, Chapter 13 bankruptcy can halt the collections, foreclosure, or other actions.


While some of its negative aspects are:


  • -Lengthier process. As stated above, it often takes 3–5 years to complete the court-ordered repayment plan.


  • -Some repayment is still required of you. Differing from Chapter 7, this form of bankruptcy still requires you to pay back debts to the best of your ability for the time period specified by the court.


  • -Potential dismissal. If you do not adhere to the agreed-upon payment plan, your case will be dismissed, and you can still lose your assets.


  • -Your credit score will be impacted. The impact of Chapter 13 bankruptcy is seen as slightly less severe than with Chapter 7, but it can still stay on your credit report for up to seven years and will likely complicate some financial processes.


As you can see, Chapter 13 and Chapter 7 bankruptcies can both be beneficial for those under extreme financial duress, but each is applicable to different situations and individuals.


Still unsure of which type is best for you? A qualified External link opens in new tab or windowbankruptcy attorney from the Law Offices of Winter-Black & Baker can help you. Call us today at 217-235-3400 for a consultation.