What Is the Difference Between Chapter 7 and Chapter 13?

Claudia wants to know the difference between a Chapter 13 and a Chapter 7 bankruptcy.

QUESTION: Claudia on Twitter wants to know the difference between a Chapter 13 and a Chapter 7 bankruptcy.

ANSWER: A Chapter 7 bankruptcy is what most people think of when they think of bankruptcy. It’s a total bankruptcy. It’s the atomic bomb dropped on the deal. What happens there is all of the unsecured debt except child support and student loans and the IRS, which aren’t bankruptable, all of the other unsecured debt—stuff like credit cards and those kinds of things—get zero in a Chapter 7 bankruptcy 98% of the time. The items that are secured debt like your car, your house—that kind of thing—if you have a loan on those, if you’re behind, you can catch up. Most of the time, the banks will allow you to re-sign for that debt. It’s called reaffirming that debt, and you would keep that debt and keep that car, or you could turn the car in and get rid of the debt or turn the house in and get rid of the debt. There’s a repo or a foreclosure to go along with your Chapter 7 bankruptcy, which doesn’t matter because your credit’s already destroyed. So don’t try to keep stuff if you’re in a Chapter 7. If you try to keep too many things, it screws up your fresh start because you didn’t really get a fresh start. You kept all the debt.

That’s a Chapter 7 bankruptcy. It’s the clean slate. The atomic bomb is dropped on everything.

The Chapter 13 bankruptcy is a payment plan over five years. You pay 100% of your secured debt—debt that has a lien on your house, on your car, on your TV, whatever it is. If it has a lien on something, you pay 100% of it to keep the item. You don’t get out of those payments at all, and then your unsecured debt, you pay a portion of it, not counting IRS, child support, or student loans—they get paid in full—but the other unsecured debt, you can pay a percentage of what’s owed—30 cents on the dollar or whatever. A payment plan is developed, and you pay payments for five years to get out. That’s a Chapter 13 bankruptcy.

Not a big fan of either one.