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Common confusion between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | Nov 16, 2022 | Bankruptcy

People who have too much debt and can’t make payments often declare bankruptcy to help relieve them of their financial obligations. This often saves debtors from the long-term damages and consequences of unpaid debt. Otherwise, too much debt can hamper the ability to take on loans.

While people have many bankruptcy options, typically, people only file for Chapter 7 or Chapter 13 bankruptcy – two of the most commonly used debt relief solutions. While the end result of any form of bankruptcy is to relieve debt, Chapter 7 and Chapter 13 bankruptcy work differently from each other, which causes much confusion.

Here’s what you should know:

What is Chapter 7 bankruptcy?

Chapter 7 bankruptcy is also called liquidation bankruptcy because it may use assets to pay off some or all of someone’s debt through the liquidation process. While many people fear they’ll lose everything when they file for Chapter 7 bankruptcy, it’s often a misconception. Certain assets are considered exempt while others are nonexempt.

The difference between exempt and nonexempt assets depends on what the assets are and are used for. For example, someone who has a single vehicle for work may keep their car in a Chapter 7 bankruptcy. Conversely, a vintage car collection may be considered nonexempt and used to pay off outstanding debt.

What is Chapter 13 bankruptcy?

Alternatively, people who don’t want to liquidate their assets and have some disposable income to pay off their debt, but not all of it, may go through a Chapter 13 bankruptcy. Chapter 13 bankruptcy is a debt refinancing plan. In other words, someone’s debt can be evaluated and redistributed, leaving the debtor responsible to pay off some of their debt.

The similarities between Chapter 7 and Chapter 13 bankruptcy

While it may be clear now the difference between Chapter 7 and Chapter 13 bankruptcy, it should be stated that both forms of bankruptcy have some similarities. Not only do both forms of bankruptcy relieve debt, as stated above, but they can also stop creditors or debt collectors from reaching out and demanding their dues. But, filing for bankruptcy will cause debtors to take a credit score hit, which can be rebuilt over time.

Choosing the right form of bankruptcy can be difficult without knowing your legal options. You may need to reach out for legal help when seeking debt relief.


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