What Are the Basic Differences Between Chapter 7 and Chapter 13 Bankruptcy?

Bankruptcy can be an overwhelming topic to understand, but many who investigate the available options will discover that the two choices available are Chapter 7 and Chapter 13. These two options are handled very differently and it is important for those considering bankruptcy to know the differences when choosing how to proceed. Both are nuanced and complex, but there are some major differences in how these options are pursued and completed that can help an individual know which may work best for his or her needs.

Bankruptcy is known as an option for those facing overwhelming or insurmountable debt. If the debtor elects to pursue Chapter 7 bankruptcy, all of the individual’s non-exempt property can be sold by a trustee in order for the proceeds to be put toward the debt.

However, Ohio and Kentucky both allow for many property exemptions. Most Chapter 7 scenarios are actually considered “no asset” cases, meaning that the debtor will not be forced to part with any property and the creditors will receive no proceeds. It can be difficult to know what assets are exempt during this process, but a bankruptcy attorney can be highly beneficial in analyzing your situation to help you understand what property would be considered exempt when filing under Chapter 7.

Some of the common exemptions during this process include:
• Homestead – real or personal property
• Personal Property – burial plot, motor vehicle, bank accounts, tax refunds, household goods, furnishings, musical instruments
• Wages – minimum of 75% of disposable weekly earnings
• Pensions – tax exempt retirement accounts, public employee pension
• Tools of trade – tools, books, implements
• Alimony – alimony and child support
• Insurance – disability, life, group life
• Misc. – business partnership property
• Wildcard – $1,150 of any property

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This type of filing is beneficial because it negates the debts that a person owes. While some property may be lost, often times a person can be relieved of most of their debt. In addition, this method is typically a more efficient and quick way to complete a motion for bankruptcy. It does still carry long-term consequences, though, so this option should be considered carefully.

Chapter 13 bankruptcy is often a more complicated process. This option typically is more appropriate for those who would like to protect their assets while repaying their debts in a more forgiving environment. The courts will protect a debtor who files under this plan in order for them to pay back mortgage debt or other payments through a longer period. This situation can provide protection for cosigners or other third parties on items such as automobiles.

Another important difference in the two options is that certain types of debt cannot be discharged under Chapter 7 but are eligible under Chapter 13. One of the major debts involved is any debt regarding property settlements during a divorce. These debts cannot be discharged under Chapter 7, so it is important to consider this if debt through a divorce is part of the cause of filing for bankruptcy.