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Chapter 7 versus Chapter 13 bankruptcy

Types of bankruptcy are usually referred to by chapter number. A bankruptcy’s chapter refers to the part of the federal bankruptcy code an individual uses to restructure his or her debts and assets. There are several types of federal bankruptcy that people can choose from. A Tennessee bankruptcy attorney can help explain the differences and help individual clients determine which type is right for their needs.

Two of the most frequently used types of bankruptcy are chapter 7 and chapter 13. Here is a brief general explanation of how each works and under what circumstances they can be used.

Chapter 7 bankruptcy

Chapter 7 bankruptcy applies to individuals who do not have enough income to pay their debts. According to the Administrative Office of the U.S. Courts, after a debtor files for chapter 7 bankruptcy relief, all of their creditors are notified to stop their debt collection attempts. The debtor must provide the court with a list of all assets, debts and expenses. Under chapter 7 bankruptcy, a debtor can keep certain assets, called “exempt” assets. The debtor and their assigned trustee meet with creditors, and the trustee will sell the debtor’s non-exempt assets to settle the debts with the creditors. Once a debt is discharged in this way, the debtor has no further obligation to make payments.  

Chapter 13 bankruptcy

A chapter 13 bankruptcy also temporarily stops debt collection attempts. But, as the Administrative Office of the U.S. Courts describes, a Chapter 13 restructures debts instead of eliminating them. It is suitable for individuals who have a steady stream of income that is enough to pay their debts but are too heavily burdened by their current payment amounts to avoid foreclosure or repossession of their property. Debtors provide the bankruptcy court with the same information but work with their creditors to create a new payment plan that may last several years. Debtors will get to keep most of their assets but are required to make payments according to the new plan.



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