What is the difference between Chapter 7 and Chapter 13 in bankruptcy?

One of the most popular questions you hear about bankruptcy is, “what is the difference between a Chapter 7 and a Chapter 13 filing?” In reality there are quite a few differences because they are two different forms of bankruptcy. It depends on each individuals situation and goals on which chapter is the best for them. There are some people that do not qualify for Chapter 7 because either they make too much money or they owe too many debts. This is a real basic coverage of these two types of bankruptcy and a bankruptcy attorney should be contacted before deciding which to file.

Chapter 7:
Chapter 7 is the more traditional bankruptcy. Most people prefer this form of bankruptcy because it is less expensive and is over the quickest.
Chapter 7 is sometimes called a straight bankruptcy. In this chapter, the debtor will turn over non-exempt property to be liquidated and distributed to the creditors. After this has taken place, the debts are discharged and the debtor has his or her fresh start.
I know that the thought of turning over any of your property makes your stomach turn but here is the kicker: most property falls into the category of exempt property and doesn’t get turned over. That means you get to keep it. The general rule is you are striped of all excess property in a Chapter 7. That means if you own extra vehicles, vacation property, lots of jewelry, etc., those types of property are the ones that get liquidated in the Chapter 7 procedure.

Chapter 13:
Chapter 13 does generally cost more then a Chapter 7. This is because a Chapter 13 plan needs to be put together for the debtor that has to be approved by the trustee. Also the debtor is not discharged as quickly as he or she would be in a Chapter 7.
Chapter 13 is like a forced budget. The plan that is put together forces the debtor to pay the trustee a certain amount for 3 to 5 years. This means that the debtor’s discretionary income will go to pay his creditors.
An example of this can be seen with some simple numbers. If a debtor makes $4000 a month and has $3000 in expenses per month (not including paying off unsecured creditors), that leaves $1000 in discretionary income. The Chapter 13 plan will require that $1000 to be paid to the trustee who distributes it evenly amongst the creditors. Over 60 months that is $60,000 going to the creditors, so if you owe over $100,000 you can see the benefits.
Generally the numbers are not this clean and $1000 is a pretty high number for the discretionary amount but it gives you an idea of how the process works. But the best part about filing a Chapter 13 plan is no matter what property is owned the debtor is permitted to keep it.