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What's the difference between Chapter 7 and Chapter 13 bankruptcy?

When an individual is considering filing for bankruptcy, they are often confused about the various options available to them.

Under the United States Bankruptcy Code there are six different forms of bankruptcy, with each form being identified by the chapter of the code in which they are codified.

The six types of bankruptcy are:

  • Chapter 7
  • Chapter 9
  • Chapter 11
  • Chapter 12
  • Chapter 13
  • Chapter 15

Among these six forms of bankruptcy, the most common options for individuals are Chapter 7 and Chapter 13 bankruptcy. There are pros and cons to both Chapters 7 and 13 and determining which form of bankruptcy is best in any particular situation can be challenging.

Why should I hire an attorney?

Determining which form of bankruptcy is best for your financial future depends upon a variety of factors and circumstances unique to your case. It is important that you consider all of your options when filing for bankruptcy in Nevada as there are several key distinctions between the forms that can have a significant impact on your financial future.

Contact the experienced Las Vegas bankruptcy attorneys at 702-DEFENSE to discuss your individual circumstances and determine which form of bankruptcy is best for you.

What is the most common form of bankruptcy for individuals?

Individuals most commonly file for Chapter 7 or Chapter 13 bankruptcy. Among those two options, Chapter 7 is the more common option, accounting for up to 65% of total bankruptcy filings by consumers.

Even though both forms of bankruptcy are common, there are several key differences between the two that must be understood by any debtor before filing for bankruptcy.

Which form of bankruptcy is the “easiest?”

While filing for bankruptcy is never simple, Chapter 7 tends to be the most straightforward and efficient form of bankruptcy. Many Chapter 7 cases can be resolved within a matter of months. A Chapter 13 repayment plan, by contrast, can take anywhere from three to five years.

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is often referred to as “straight” bankruptcy.

Under Chapter 7, a court-appointed trustee collects the property of the individual filing for bankruptcy (known as the “debtor”) and liquidates any non-exempt property.

The proceeds of this liquidation will then be collected by the trustee and distributed to creditors in order to satisfy any claims they may have.

At the completion of the Chapter 7 process, most of the debtor's debts will be discharged with the exception of several debts that are non-dischargeable in bankruptcy. Some of these non-dischargeable debts include student loans and tax debts.

What is Chapter 13 bankruptcy?

Unlike the Chapter 7 bankruptcy process which liquidates significant portions of a debtor's assets and distributes the proceeds to creditors, Chapter 13 is best viewed as a financial reorganization of the individual's debts, allowing the debtor to repay creditors over an extended period of time in accordance with a Chapter 13 plan.

Under Chapter 13, upon filing for bankruptcy, the debtor will submit a repayment plan which will outline a 3 to 5 year repayment structure in order to satisfy creditor claims. Upon the successful completion of this plan, many unsecured and secured debts accounted for under the plan will be discharged.

What are the benefits of Chapter 7 bankruptcy?

As discussed above, Chapter 7 is often the quickest and most efficient way to discharge debts in bankruptcy. Frequently, the Chapter 7 bankruptcy process can be completed within six months.

Once a debtor has filed for Chapter 7 bankruptcy, an automatic stay will be issued which will temporarily cease foreclosure proceedings and prevent creditors from collecting on debts while the case is pending.

Additionally, though Chapter 7 entails a liquidation of a debtor's property, many important items of property are exempt from liquidation, including the debtor's primary residence, automobile, and other necessities.

Unlike Chapter 13, under Chapter 7 the discharge of many debts are not dependent upon the successful completion of a repayment plan.

What are the benefits of Chapter 13 bankruptcy?

Under Chapter 13, there are fewer forms of debt that are non-dischargeable than under Chapter 7.

Some common debts that are dischargeable under Chapter 13 and not Chapter 7 include:

  • Debts stemming from willful and malicious injury to property.
  • Debts incurred due to tax obligations.
  • Debts arising from divorce or separation agreements.

By filing for Chapter 13, a debtor may be able to keep important property and discharge debts through the completion of a more manageable repayment plan over the course of three to five years.

What are the benefits of Chapter 7 bankruptcy?

Unlike Chapter 13, the discharging of debts under Chapter 7 is not necessarily contingent upon repayment of those debts. Under Chapter 7, the proceeds of the liquidation of the debtor's non-exempt property is distributed to creditors based upon the priority of the creditor's claim.

Even if the proceeds from the liquidation are exhausted before all of the creditors have been repaid, the debtors debts will generally still be discharged with certain non-dischargeable debts being the exception.

Under Chapter 13, it typically takes the debtor three to five years to successfully complete the repayment plan. A Chapter 7 bankruptcy case, on the other hand, can be completed in as little as three to six months. This allows the debtor to discharge their debts and move forward in a more timely manner.

Common benefits of Chapter 7 and Chapter 13 bankruptcy

Under both chapters, an automatic stay will be issued once the bankruptcy petition is filed. This stay puts a temporary hold on any foreclosure and eviction proceedings while the bankruptcy is pending and temporarily prevents creditors from attempting to collect on any debts.

Additionally, both Chapters provide debtors with an opportunity to keep important personal property such as the debtor's primary residence.

Which Chapter is right for me?

Determining whether you should file for Chapter 7 or Chapter 13 depends largely upon your individual financial circumstances. In Nevada, a means test will applied to determine if you are eligible to file for Chapter 7. The means test compares the household income of the debtor against the median Nevada household income. If the debtor makes less than the median income (either before or after certain deductions are taken into account), Chapter 7 will be the likely choice.

Chapter 13 may be the primary option for debtors who make more than the median household income. For a debtor to be eligible for Chapter 13, they must have less than $360,475 in unsecured debt and less than $1,081,400 in secured debt.

Determining whether Chapter 7 or Chapter 13 is the best option is a fact-specific inquiry that depends on the unique circumstances of your case. To schedule a consultation, contact the Nevada bankruptcy attorneys at 702-DEFENSE today.

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