Types of Consumer Bankruptcy Explained

Chapter 7 or Chapter 13—The Differences

Most consumers file one of two types of bankruptcy cases, either a Chapter 7 case or a Chapter 13 case.

In a Chapter 7 case, the general rule is that you get to keep enough property to make a fresh start in life but the rest of your property is sold to pay off as much of your debt as possible. It is often called a liquidation bankruptcy.

In a Chapter 13 case, the general rule is that you get to keep all of your property but you must repay your debt in monthly payments that stretch out from 3 to 5 years. It is often called a wage earner plan. You make payments until the end of the payment plan and any debt balance that is still owed is wiped out.

There are lots of rules in both kinds of bankruptcy and lots of exceptions to the rules, too. Here are some of the differences between a Chapter 7 case and a Chapter 13 case.

How Long Does It Take?

A Chapter 7 case lasts about 3 to 6 months. A Chapter 13 case last about 3 to 5 years.

Property That Gets Sold

In Chapter 7, some of your property may be sold to pay your creditors. There is a schedule of “exemptions” which describes what you get to keep and you may get to keep everything you want.

In Chapter 13, you get to keep almost all of your property but you have to make monthly payments toward your bills, which are paid through the Court.

Mortgaged Homes, Car Loans, & Secured Debt

In a Chapter 7, you can decide if you want to let the creditor have the property, or continue your payments, or buy the property for a single lump sum payment equal to the current replacement value of the property.

In a Chapter 13, you have the option to make up for missed payments to avoid losing the secured property by including the past due amount in your payment plan. You still have to stay current on the future payments.

The Paperwork Needed

The paperwork needed to file bankruptcy is basically the same for either a Chapter 7 or a Chapter 11 case.

The following is a detailed list of needed documents and information.

• the most recent bill from of any kind that you have received from everyone you owe
• any lawsuit papers or letters from a lawyer that you have received in the last 6 months
• the last 6 months of pay stubs for each person in your household who works
• if you own any real estate, bring your real estate deed and your mortgage payment book or a payment coupon
• all titles to any motor vehicles you own
• a copy of your most current credit report; if you have all three, bring all of them
• the last 6 months of statements for every kind of bank or credit union account you have
• the last 6 months of statements for every kind of IRA or other savings or retirement account you have