Published April 18, 2019 by Xue Connelly

Filing for bankruptcy can be an overwhelming process. You know there are multiple chapters of bankruptcy, but which one is right for your situation? Attorney Xue Connelly breaks down the differences between the two most common types of bankruptcy for individuals: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is a debt forgiveness plan which typically lasts between four and six months. It involves asking the bankruptcy court to dismiss the majority of your debts with some exemptions, such as taxes, alimony and child support. In return, non-exempt assets will be turned over to the bankruptcy trustee, and then sold and distributed amongst your creditors.

“Most Chapter 7s are no asset cases, meaning the assets you do have are protected by state law exemptions that apply,” says Connelly. “For example, 100% of retirement plans are exempt from a Chapter 7 trustee which means even after filing a Chapter 7 you’ll keep your retirement plan. There’s also an exemption for a certain amount of money for your personal property. Then there are exemptions that range from very personal things to the items you need in order to start your new life after filing a Chapter 7 — whether that’s clothing, your wedding ring or your family Bible.”

“In Virginia, there’s also a homestead exemption,” Connelly explains. “It’s a general exemption that allows an individual to use it for whatever they want for up to $5,000. And if you’re over 65 the exemption allows for up to $10,000.”

“Chapter 7 bankruptcy is limited to individuals who make a certain amount of income and if you make over that amount, you are no longer eligible to file a Chapter 7 and will need to consider a Chapter 13 instead,” Connelly explains.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy, on the other hand, is both a debt forgiveness plan and a debt repayment plan that can last between three and five years. “In a Chapter 13, the bankruptcy court assesses all your assets and income and based on your existing debts determines a percentage ranging from 1% to 100% to pack back your creditors. The court breaks it down into sixty payments over the course of three to five years so you’re paying the trustee once, instead of looking for five or ten different payments to different credit cards,” says Connelly.

Connelly says one reason you might file a Chapter 13 bankruptcy rather than a Chapter 7 is if you are behind on paying your mortgage. “Chapter 13s allows you to catch up on your payments. Let’s say you owe a back-mortgage of $50,000. With a Chapter 13, you can pay that back over five years while keeping your home and equity in the property. Whereas a Chapter 7 will stop a foreclosure initially, however, you will eventually lose the house unless you can pay back the mortgage completely.