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Understanding The Differences Between Chapter 7 And Chapter 13 Bankruptcy
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Understanding The Differences Between Chapter 7 And Chapter 13 Bankruptcy


The law provides several different bankruptcy options for individuals who are unable to pay the debt they owe to creditors. By filing for bankruptcy, debtors can put an immediate end to calls and letters from creditors and collection agencies, and they can begin making a fresh start. The two most common types of bankruptcy are Chapter 7 and Chapter 13, and the following are some of the major differences between them.


Chapter 7 bankruptcy is designed for people with a low income; thus, filers must not exceed a maximum income requirement in order to qualify. The benefit of Chapter 7 is that it allows low-income debtors to discharge their debt by selling any non-exempt assets. However, if they have no assets (a common circumstance), the creditors receive nothing and the debtor is not required to pay. Chapter 13 bankruptcy is designed for debtors with a higher income who can benefit from restructuring their debt with more affordable payments.


With Chapter 7 bankruptcy, filers will likely have to forfeit some of their assets in order to repay their debt. However, each state has its own system of exemption. In Virginia, for example, motor vehicles valued at $6,000 and below are exempt, along with clothing, household goods, health savings accounts, and other items. With Chapter 13 bankruptcy, on the other hand, debtors are allowed to keep all of their assets. However, they will be required to pay a certain amount to creditors for each non-exempt asset they choose to keep.

Length Of Time

Chapter 7 is the faster route to a fresh start. Once assets are liquidated and paid to creditors, all other existing debt will be discharged and the individual can start over with a clean slate. Since Chapter 13 involves reorganization of finances rather than liquidation, the mandated payment plan can last anywhere from three to five years. The advantage of Chapter 13 is the opportunity to catch up on missed mortgage payments and avoid foreclosure.

In addition to Chapters 7 and 13, there are two other types of bankruptcy, Chapters 11 and 12. Each of these has benefits for certain types of debtors. Learn more about the full range of bankruptcy options at