Chapter 13 vs. Chapter 7 Bankruptcy — What’s the Difference?

Filing for Chapter 7 bankruptcy can help you get back on your feet if you are struggling under a mountain of debt. However, Chapter 13 bankruptcy also offers an opportunity for a fresh financial start.

So what is the difference between these two types of bankruptcies? And which is the right solution for your debt problems?


What Is Chapter 7 Bankruptcy?

In Utah, Chapter 7 is designed to wipe out most unsecured debts, including medical bills, credit cards, personal loans and past-due utility bills.

When filing for this type of bankruptcy, debtors are typically able to keep their car and house. Nonexempt assets — such as a second vehicle or home, expensive jewelry, art, guns, family heirlooms or collectibles — will likely need to be surrendered to the court. The trustee will then sell this property to pay creditors. For this reason, Chapter 7 is considered a liquidation bankruptcy.

If you have no nonexempt assets, your creditors will get nothing when you get your discharge.

Chapter 7 is a relatively quick process. In most cases, debtors receive a discharge within three to six months after filing.

What Is Chapter 13 Bankruptcy?

In Utah, Chapter 13 doesn’t erase your debts and it doesn’t force you to give up any assets. Instead, you’ll enter into a repayment agreement, hence the reason this type of case is referred to as a reorganization bankruptcy.

Most repayment plans have a duration of three to five years, after which you will receive a bankruptcy discharge.

Priority debts, including child support and certain tax obligations, must be paid in full by the end of the repayment period. You will also need to be current on payments for secured debts, like your mortgage and car loan.

Unsecured debts don’t need to be fully paid for a bankruptcy discharge, though the court may expect some of your disposable income to go toward these bills.

Which Bankruptcy Filing Option Should You Choose?

Unfortunately, this decision may not be yours to make.

To be eligible for Chapter 7, your disposable income must fall under a certain threshold. If you make too much money, the court will require you to file for Chapter 13.

But that doesn’t mean everyone who qualifies should file for Chapter 7.

This bankruptcy filing option may not make sense if you have significant, nondischargeable debts, such as student loans and back taxes. And if you have co-debtors — like a friend or family member who cosigned a loan — they’ll still be on the hook for the debt.

In addition, Chapter 13 allows you to keep all your assets and property, an important consideration for some debtors. This type of bankruptcy can also help you avoid foreclosure, as you’ll have more time to get caught up on missed mortgage payments.

Ultimately, the safest way to choose a filing option is to consult an experienced Utah bankruptcy attorney.

In the Salt Lake City area, the legal team at Lewis Adams & Associates offers complimentary consultations. To learn more about the differences between Chapter 13 and Chapter 7 bankruptcy in Utah, contact our West Jordan, Utah, office today.