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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 major differences. Only a few of the more significant differences will be discussed here.

Chapter 7 is what is often called "straight bankruptcy" or "liquidation." In a nutshell, if you qualify you walk away from your general unsecured debts. If you have secured debts (home, car, furniture, appliances) in most cases you can work out a deal with the creditor to keep that property after your case is over as long as you can keep paying for it, and are either current on the payments already, or you can bring the payments current quickly. You also have the option of surrendering the collateral and discharging any debt that might otherwise remain on that account. More than 90% of all people get to keep all of their personal belongings, but Chapter 7 can be risky, and there are times when you could lose something that you would rather keep. The vast majority of Chapter 7's are "no asset cases," which are almost always over with in four months. "Asset cases," where something valuable is taken and liquidated, usually last for two or three years, but in most of those cases once the property has been turned over to the trustee the debtor is no longer directly involved in the process.

Chapter 13 is often called "wage earner," even though you don’t actually have to earn wages in order to qualify. 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). General unsecured debts get whatever is left over, which can be anywhere between 10% and 100%. 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 which 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 taxes and debts based on fraud, theft, intentional injuries, and certain divorce-related debts.