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Difference between Chapter 7 and Chapter 13 bankruptcy

On Behalf of | May 6, 2023 | Bankruptcy

If you’re one of many Georgia residents who’ve been struggling to make ends meet at home or stay afloat in business over the past few years, you might cringe every time a bill arrives in the mail. Paying rent or a mortgage, buying groceries and covering expenses that your children need for school or extracurricular activities can become a heavy burden when a financial crisis hits. Sometimes, additional support is needed to help get things back on track, like filing for Chapter 7 or Chapter 13 bankruptcy. 

These two programs are valuable financial tools that have helped many individuals and businesses alleviate debt and lay the groundwork for restored financial stability. Filing for bankruptcy isn’t a magic fix-all to your financial problems. For instance, if things got out of hand because you lost your job or experienced a medical crisis in your family, such issues may still be present after filing for bankruptcy. However, it provides debt relief that can make it less stressful to navigate additional circumstances that are adversely affecting family life or business.  

Chapter 7 uses asset liquidation to gain proceeds to pay back debt 

Each bankruptcy program has its own eligibility requirements. To qualify for Chapter 7, your income must be below a certain level. If you have gotten behind on tax debt, a credit card balance, your home mortgage or other monthly payments but earn more than the median income in Georgia, you won’t be eligible to file a Chapter 7 petition.  

The Chapter 7 program provides immediate debt relief. Assets you own will be liquidated. The proceeds of those sales will then be used to pay back your creditors. Certain debts are not dischargeable, such as child support or compensation you’ve been ordered to pay as part of a personal injury claim. A benefit of Chapter 7 is that it enables you to start afresh with a clean financial slate.  

If you file under Chapter 13, all your debt will still exist 

The main difference between Chapter 7 bankruptcy and Chapter 13 is that Chapter 7 uses asset liquidation to generate proceeds to pay off debt, whereas Chapter 13 does not discharge debts. The way this program works is that your lenders would agree to a restructured payment plan. Your debt would still exist. However, you might be able to lower monthly payments or extend the life of a loan, making repayment more feasible during a financial crisis. 

To be eligible, you must prove that you have a reliable means of income and that your earnings are above the state’s median level. Business owners often choose this bankruptcy program because it enables them to keep their doors open while at the same time alleviating their financial burdens by reorganizing monthly payments.  

Both types of bankruptcy affect your credit score 

Whether you file for Chapter 7 or Chapter 13, it will remain on your credit report for some time. Chapter 7 typically is not removed from a report for 10 years, while Chapter 13 is removed several years earlier. In many cases, the benefits bankruptcy provides may be worth taking a hit on a credit report, which is temporary and can be rebuilt over time.