Basic Differences Between Chapter 7 and Chapter 13

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The general purpose of bankruptcy is to allow individuals and business entities to discharge intractable debt and start over new. Individuals and married couples who file for bankruptcy usually file under either Chapter 7 or Chapter 13. Both allow you to discharge most of your debt, but each has different eligibility requirements and works in different ways.

Eligibility Requirements

Only individuals are allowed to file Chapter 13. The only exception is business owners who run sole proprietorships. Since there is no legal distinction between the personal assets and the business assets of sole proprietors, they are allowed to file Chapter 13. Business entities of any type, as well as individuals, are allowed to file Chapter 7.

Eligibility requirements for both Chapter 13 and Chapter 7 also relate to your finances. Chapter 13 has limitations on the amount of debt you can owe and still qualify. These limits undergo frequent revision, but as of April 2019, you cannot file Chapter 13 if you owe more than $1,257,850 in secured debt (e.g., mortgages or car loans) or $419,275 in unsecured debt (e.g., medical bills or credit card balance). Chapter 7 bankruptcy eligibility involves passing a means test to determine that your disposable income is low enough for you to qualify.

Liquidation Versus Reorganization

Chapter 7 involves the liquidation of your assets. Your assets are anything that you own, and liquidation means selling them to pay off your debtors with the proceeds. However, not all of your property gets liquidated. Some property is exempt, including life essentials and items that you use to earn a living. At least a portion of the equity that you own in your home is exempt, meaning that it may be possible to retain your home if you file for Chapter 7. There are limits to exemptions on items like personal property or jewelry, meaning that you can keep these items as long as their collective value remains below a certain dollar amount.

Chapter 13 does not require you to liquidate any property, which means that you can keep all of your possessions. Rather, it allows you to reorganize your debt by creating a payment plan by which you make a monthly payment to your trustee, i.e., the administrator of your bankruptcy, who then distributes it among your creditors. It works similarly to a debt consolidation loan.

Call an attorney, like a bankruptcy lawyer in Memphis, TN, to help you determine whether you meet the criteria to file Chapter 7 and/or Chapter 13 when you contact our office. Should you qualify for both, we can advise you about which would be more advantageous.

Thank you to the experts at Darrell Castle & Associates for their input into bankruptcy law.