What is the difference between Chapter 7 and Chapter 13?

Most of the same laws and rules apply to both chapters, but there are some important differences. A few of the most important differences will be discussed here.

Chapter 7 is what is often called "straight bankruptcy" or "liquidation." In a nutshell, you walk away from your debts, and surrender any secured property to the creditor, unless you can work out a deal with the creditor to keep paying for that property after your case is over. More than 90% of all people get to keep everything. The Chapter 7 process is almost always over with in four or five months.

Chapter 13 is often called "wage earner," even though you don’t actually have to earn wages. As long as you have regular income from any source, whether it is from a paycheck, or from Social Security, or a pension plan, or something else, you can file a Chapter 13. In a nutshell, this is a budget process, where we figure out how much money you have coming in, and how much you have to spend for things like rent, utilities, food, gas, insurance, etc. Whatever is left over is paid into your Chapter 13 case, and your debts are paid out of that over the next 3 to 5 years. Secured debts are paid up to the value of the property, (with interest, but usually at a much lower monthly rate than you are paying now), and unsecured debts get whatever is left over. Even if those debts are not paid in full, they are discharged when the case completes successfully. (For further explanation, see FAQ on the Difference between Secured and Unsecured Debt.)

There are some debts that cannot be discharged in a Chapter 7, but can be discharged in a Chapter 13 after part of the debt is paid. This is the government’s way of persuading you to pay back some of your debts, if at all possible. Some examples of this are debts based on fraud, theft, intentional injuries, and certain divorce debts.