The Difference Between Chapter 7 and Chapter 13

Understanding the key differences between Chapter 7 and Chapter 13 can help the overwhelming feeling of your financial struggles. Choosing the right chapter is the first step toward regaining financial control. However, how do you know which one is truly the best? While both offer debt relief, they are applicable in different situations and provide distinct benefits.

Chapter 7 Bankruptcy: A Fresh Start

Chapter 7 bankruptcy is often the best option for individuals with limited income. If your household income falls below the median for your county and family size, you may qualify for Chapter 7. This type of bankruptcy allows you to wipe out most unsecured debts, such as credit cards, medical bills, payday loans, and debts from repossessions or foreclosures.

Even while discharging these debts, most filers keep their essential assets under Oklahoma’s bankruptcy exemptions. However, certain obligations—like child support, alimony, some tax debts, and student loans—are not dischargeable. Additionally, if you have non-exempt assets (i.e. more than one vehicle or real property), then the Trustee could seize those assets. While people often refer to a Chapter 7 bankruptcy as a fresh start, it’s also commonly known as a liquidation bankruptcy.

Chapter 7 offers a relatively quick path to financial relief, usually closing within a few months, and gives you a clean slate to rebuild.

Chapter 13 Bankruptcy: A Repayment Plan

A Chapter 13’s design is specifically for individuals who earn more than the median income and have the ability to repay a portion of their debts over time. Instead of immediately discharging your unsecured debt, Chapter 13 sets up a court-approved repayment plan lasting three to five years. Your monthly payments are based on your disposable income—what’s left after covering necessary living expenses like housing, utilities, food, and transportation. Once you complete the repayment plan, any remaining unsecured debt is discharged.

Chapter 13 can also help you catch up on mortgage payments, protect assets from foreclosure, and manage debts that aren’t dischargeable in Chapter 7. However, a Chapter 13 cannot fix a foreclosure if you do not have the potential funds to make up the missing payments. An attorney can review your disposable income to evaluate what repayment plan is best for you.

On rare occasions, a person’s income can fall into a gray area, making a Chapter 13 unsuitable. This can mean that you make too much to qualify for a Chapter 7, but you don’t quite make enough for a Chapter 13 for the Trustee to accept your repayment plan. In these instances, it’s essential to keep a level head. Most unsecured creditors are willing to make deals for complete payoffs, especially if they are a debt collector.

Which Option is Right for You?

The biggest difference between Chapter 7 and Chapter 13 lies in the approach: Chapter 7 gives you a fresh start by eliminating most unsecured debts, while Chapter 13 allows you to restructure and repay them over time. Often, the choice will come down to your income.

Additionally, knowing what debts qualify for discharge is crucial when choosing bankruptcy. If you mostly have tax debt and very little unsecured debt, bankruptcy might hurt you more than help, since tax debt is not dischargeable. Alimony is also not dischargeable in bankruptcy court, making your court-ordered obligation binding even if you file hoping to lessen the financial burden.

Further, any debt the court awards to you in a divorce proceeding can still end up your responsibility after completing the bankruptcy process. This is because the Bankruptcy court has no jurisdiction to supersede your agreement with your ex-spouse to pay those debts. The specific clause in Oklahoma law is the Hold Harmless Clause, which forbids a former spouse from defaulting on joint marital debts they have a duty to pay. With all this in mind, you should be able to make the best decision for yourself.

Talk to a Tulsa Bankruptcy Lawyer Today

If you’re unsure which bankruptcy chapter fits your situation, we’re here to help. Thousands of Oklahomans file for bankruptcy each year, and many of them once felt just as trapped as you might now. Our experienced Tulsa bankruptcy attorneys at Kania Law Office can guide you through your options and help you file quickly. Call us today at 918-743-2233 for a free consultation, or reach us on our Ask A Lawyer page to take the first step toward financial freedom.