Chapter 7 vs. Chapter 13 Bankruptcy Differences

Which bankruptcy option is right for you?

Many consumers elect to file for bankruptcy because they feel they’ve run out of options. But they’ve still got an important choice to make. Will it be a Chapter 7 liquidation or a Chapter 13 debt restructuring partial repayment plan? A quick, clean discharge or a three- or five-year partial repayment plan? It’s important to understand the consequences of choosing Chapter 7 vs. Chapter 13 bankruptcy so that you can get the full benefits of available. At Marlin Branstetter Attorney at Law, I educate my clients about the pros and cons of these types of consumer bankruptcy. Based in Anaheim, I represent clients throughout Southern California.

Basic difference between a Chapter 7 vs Chapter 13 bankruptcy

Bankruptcy offers honest but unfortunate debtors relief from debt they can never hope to repay. However, that relief comes in different packages that serve somewhat different purposes. Basically, Chapter 7 bankruptcy is a liquidation, while Chapter 13 is a reorganization. 

Here are the key features that set these types of bankruptcy apart:

• Chapter 7 — This process discharges most if not all debts immediately. It may require the debtor to sell off some assets to partially repay creditors, although the debtor’s assets are largely exempt.
• Chapter 13 — This remedy requires the debtor to enter into a court-approved plan that calls for using their disposable monthly income to make partial repayment of unsecured debts over a three- or five-year period. Upon completion of the plan, the rest of those debts are discharged. Secured debts remain in force. 

Which form is preferable is a matter of individual circumstances, so it’s important to consult a bankruptcy lawyer who will take the time to understand your unique situation. 

Eligibility for Chapter 7 and Chapter 13 bankruptcies

The first question to answer is which form of bankruptcy you are eligible to file. Basic eligibility requirements are as follows:

• Chapter 7 — The debtor must pass the “means test,” proving their average monthly income is less than the median income for a household of their size in their state. However, a debtor with income above the median can still pass the means test if their disposable income after allowable deductions is too low to make debt repayments. 
• Chapter 13 — The debtor must have a reliable source of income that makes a repayment plan feasible. In addition, as of 2024, their unsecured debt must be no more than $465,275 and their secured debt no more than $1,395,875.

Another important consideration for anyone contemplating bankruptcy is whether their debt is dischargeable. Certain types of debt cannot be cancelled in bankruptcy and some debt cannot be discharged because it was taken on too close to the bankruptcy filing date. 

How does bankruptcy discharge work for each bankruptcy type?

Chapter 7 is the fastest route to debt discharge. Some cases are completed within a few months. Chapter 13 requires the debtor to complete a repayment program, the duration of which is set at either three or five years.

What happens to property in a Chapter 7 vs. Chapter 13?

In Chapter 7, the bankruptcy trustee has the authority to take possession of property that is not covered by statutory exemptions, including the debtor’s home. As of 2024, California debtors are entitled to a homestead exemption of $349,720 to $699,426, depending on the median home prices in the county where they live. So if the debtor’s home equity is above the applicable exemption, the home may have to be sold and the excess equity applied to creditors.

In many cases, Chapter 13 is the preferred option for debtors who want to hold onto property, especially their home. Although a mortgage loan is a secured debt that remains in force despite filing for bankruptcy, mortgage arrearages can be repaid over the three or five years of the Chapter 13 plan. This can give the debtor a chance to catch up on regular loan payments and perhaps to obtain refinancing.

Since both types of bankruptcy options allow for exemptions, some debtors may be able keep as much of their property in Chapter 7 as they can in Chapter 13. This is another reason to choose your bankruptcy attorney wisely. 

Contact an Anaheim bankruptcy lawyer for personalized assistance

At Marlin Branstetter Attorney at Law in Anaheim, I help clients make the best choices for debt relief through bankruptcy. To schedule a time to speak with me, call 714-276-8589 or contact me online.