What are the differences between Chapter 7 and Chapter 13 bankruptcy?

Personal bankruptcy may help those who are struggling with debt. It is important to understand the differences between Chapter 7 and Chapter 13 bankruptcy.

People who live in the District of Columbia and elsewhere may feel overwhelmed and hopeless when they are dealing with significant debt. The constant cycle of insurmountable bills can seem endless and impossible to overcome. Fortunately, there are options for those who are going through these challenges. Chapter 7 and Chapter 13 bankruptcy may bring debt relief to families, rather than continuing to struggle with bills they cannot afford. It is important, however, to understand the differences between these two types of personal bankruptcy.

What is Chapter 7 and how does it work?

According to the Administrative Offices of the U.S. Courts, Chapter 7 is known as the "clean slate" bankruptcy because it wipes most debts clean, and those who qualify are able to start over. The types of debt that are liquidated often include credit card debt, medical bills and other types of consumer debt. Other types of debt, such as federal student loans, child support, alimony and certain taxes, do not qualify for a Chapter 7 discharge. However, reducing one's financial burden through a Chapter 7 may help make non-dischargeable debts easier to pay.

There are certain drawbacks to a Chapter 7 bankruptcy. For example, one's home or extra vehicles may be taken to repay creditors before the discharge is complete.

Chapter 13 - the repayment plan

The United States Bankruptcy Court describes Chapter 13 bankruptcy as the type that gives those with a regular income a chance to get caught up on their bills and repay them more easily. Debtors who qualify for Chapter 13 may be able to keep their homes and other assets that might otherwise have been liquidated in a Chapter 7 bankruptcy. A manageable repayment plan is created during a Chapter 13 filing, of which the creditors and court must approve. Typically, those who file for Chapter 13 are given three to five years to repay their debts. Funds for the repayment plan are paid to a trustee, who distributes them to each of the creditors.

While a Chapter 13 bankruptcy is in effect, it is important for the debtor to manage his or her money wisely and avoid being late on mortgage bills and other payments. Most of the debtor's disposable income will be used for the repayment plan; however, many who file for Chapter 13 appreciate the fact that they are able to repay their debts sooner than they would have expected otherwise.

Those who are considering filing for bankruptcy will need to speak with an experienced bankruptcy attorney in Washington, D.C., to determine which method is best for their situation.