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Dear Kim: Chapter 7 vs. Chapter 13What’s the Difference?

Dear Kim,

I am very confused, and I was hoping you could help me. I am in a lot of debt and the credit counselor I spoke with suggested that we investigate bankruptcy. I know my sister filed Chapter 7 bankruptcy about 15 years ago, but I know things have changed since then. I also heard about Chapter 13 bankruptcy if you own a home, which we don’t. What is the difference?

Thank you,

Sarah, PA

Dear Sarah,

Navigating the world of bankruptcy can be difficult. I strongly suggest that you speak with a bankruptcy attorney before making a decision. If you choose to pursue filing bankruptcy, it is in your best interest to utilize an attorney for the filing. Please contact your local bar association for a list of attorneys. There are some major differences between Chapter 7 and Chapter 13 bankruptcies. Chapter 7 is filed most often and is known as the liquidation bankruptcy, meaning that you would liquidate any eligible assets (turn into cash), and pay back the debt. The court would then discharge any debt owed beyond that. Chapter 7 has income requirements so you would be responsible to take a means test prior to filing. This test determines your eligibility. Once filed and the judge reviews everything, there is a meeting with your creditors. If everything is satisfactory the judge will discharge the bankruptcy. This has a typical time frame of 4-6 months from filing. Chapter 13 is different. In a Chapter 13, you repay all or a portion of the debt through a court appointed repayment plan. This plan can last from 3 to 5 years. You make the payments to the court, and they disperse the payments to the creditors. Chapter 13 is a viable option for individuals who have too much income for Chapter 7, or have certain assets, like a car or house, that they do not want to liquidate. For both types of bankruptcy you will need to complete pre-bankruptcy credit counseling. During this session, a bankruptcy counselor will discuss all of your financial options, including bankruptcy, to aid you in making your decision. Once the bankruptcy is filed you will be responsible for taking a bankruptcy education course. This course will teach you invaluable financial literacy. 

Good Luck,


Kimberly Cole is Education Outreach Coordinator with Novadebt. Novadebt is a member of the National Foundation for Credit Counseling.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients


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