What is the difference between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 is the simplest, most straightforward type of bankruptcy and often the most beneficial for many people. It wipes out credit card debt, repossessions, foreclosure deficiencies, medical bills, signature loans, certain taxes, and most other types of debt.

Some exceptions to a debt getting erased (also known as discharged) are student loans, child support, alimony, and recent debts to the IRS. You must qualify financially to file Chapter 7 based on either being under Arizona's median income for your family size, passing the means test (a complicated test based partially on IRS living standards and partially on your actual expenses) or based on the type of debts you have. Certain high income earning individuals may be able to file Chapter 7 if more than half of their debts are business or investment related. You cannot receive a discharge in a Chapter 7 if you have received a previous Chapter 7 discharge in the past eight years.

You are eligible for discharge approximately three months after filing and can immediately start rebuilding your credit. Taking positive steps to rebuild your credit after your discharge is vital, because it is possible to finance a vehicle immediately after your discharge and purchase a house after just two years.

In contrast, Chapter 13 bankruptcy involves a three to five year repayment plan that only requires you to pay back what you can afford. After the three to five years, you will receive a discharge (meaning your remaining debts are erased). Payments in a Chapter 13 can be as low as $100 a month or in the thousands depending on your income and how much debt is required to be paid through the plan. A major reason many people file Chapter 13 is that their income exceeds the limits on Arizona’s means test for filing Chapter 7. Other common reasons to file a Chapter 13 instead of a Chapter 7 include removing a second mortgage on a house, protecting assets that you would lose in a Chapter 7 by repaying part of your debt, catching up on your house payments when you are facing foreclosure, getting out of debt when you have received a Chapter 7 discharge in the past eight years, and getting rid of a debt assigned to you per a divorce decree other than child support or alimony.