Understanding the Differences Between Chapter 7 vs. Chapter 13 Bankruptcy

Chapter 7 and Chapter 13 bankruptcy can both help individuals and businesses overwhelmed by debt. Significant differences, however, exist between these two options. So, if you are considering filing for bankruptcy, you should be aware of these differences before committing to one over the other. 

The knowledgeable and experienced bankruptcy lawyers at The Law Offices of Omar Gastelum & Associates can review your situation and help determine which bankruptcy method is best for you. To learn more, contact our office today to schedule a consultation of your case.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is available for individuals and businesses that have so little in income or assets they cannot pay back their creditors. Known sometimes as a “liquidation bankruptcy,” Chapter 7 bankruptcy involves selling off assets in order to repay debts. When someone qualifies and files for Chapter 7 bankruptcy, a trustee is appointed by the court. This person informs all creditors of the bankruptcy filing and organizes them by the type of debt owed by the filer.

The debtor’s assets are identified, and those assets that are not exempt from the bankruptcy process are sold off in order to pay the debts. When all the assets are sold and creditors paid off in the order of absolute priority, any remaining debts are typically forgiven by the court. Certain types of debt, like student loans, do not qualify, and an experienced bankruptcy attorney can explain what will and will not fall under the Chapter 7 rules.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows debtors to restructure their debts and repay them according to this new payment structure. Chapter 13 restructuring or reorganization of debt is available only to consumers (Chapter 11 is bankruptcy for businesses to reorganize and repay their debt). Chapter 13 plans are typically set for a term of 60 months or 5 years, but sometimes––depending on income––a debtor may establish a Chapter 13 plan for as little as 36 months. Factors considered on the amount of the Chapter 13 plan include:

  • Income;
  • Expenses;
  • Debt; and
  • Assets. 

One of the critical differences between Chapter 7 and Chapter 13 bankruptcy is that assets that would be at risk of liquidation under a Chapter 7 bankruptcy can be protected under a Chapter 13 bankruptcy. Another critical difference is that once you file for and are approved a Chapter 7 bankruptcy, that’s it––you are discharged from those debts. Under a Chapter 13 plan, you are responsible to pay for the term established, which again is typically 5 years. Any debt unpaid is usually discharged before or upon the termination of a successful Chapter 13 plan. During the Chapter 13 plan but unlike Chapter 7 bankruptcy, a debtor cannot sell assets or incur debt unless they have received court approval. What’s good about a Chapter 13 bankruptcy, however, is that it can stop foreclosures and repossessions while under Chapter 7 bankruptcy, such protections are not in place. Also, it’s important to note that a Chapter 13 plan can include old tax debts and past-due child support or spousal support payments.  

Resourceful Bankruptcy Attorney in California

Are you considering filing for bankruptcy and wish to learn more about your options? Chapter 7 or Chapter 13 may be right for you. Contact us at The Law Offices of Omar Gastelum & Associates to schedule a consultation.