Many people are surprised to learn that there are a number of different types of bankruptcy. The two that apply specifically to individuals are Chapter 7 and Chapter 13 bankruptcy. What exactly is the difference between them?

If you’re considering filing bankruptcy because you are overwhelmed with an increasing debt load, you’ll need to understand the difference between these two processes. Chapter 13 does not do away with your debt the way that Chapter 7 does. Instead, you are asked to create a payment plan over the next three to five years in which you will make regular payments to creditors. Even so, you usually don’t end up paying the total amount that you owe.

Nevertheless, you will not have your debts wiped out as you may expect when you hear the term bankruptcy. There are some advantages, such as not having to participate in liquidation. In a straight bankruptcy (Chapter 7), you are forced to liquidate assets in order to help pay for your debts. In practice this may not matter much, because most people declaring bankruptcy don’t have much to sell anyway. If they own a house and some modest possessions like furnishings, these are usually protected by state and federal bankruptcy protection laws anyway.

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