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

In short, Chapter 7 is used to wipe out credit card balances, medical bills, personal loans, and other unsecured debts. Filing a Chapter 7 will initially stop all collection actions, including repossession and foreclosure. However, secured creditors (mortgage companies, auto loan creditors) may ask the court for permission to foreclosure or repossess after notice and a hearing. Chapter 7 may be filed by any individual or legally married couple whose household income does not exceed the median income in his or her area.

Chapter 13 is generally used to prevent foreclosures or vehicle repossessions. If your home or other real property is being foreclosed on by your mortgage lender, filing a Chapter 13 will stop the foreclosure and allow you to pay your past-due mortgage payments over 3-5 years, along with any other debts you may have. It will also stop your vehicle from being repossessed and allow you to pay the balance over 3-5 years.

Chapter 13 is also used by debtors who are ineligible to file Chapter 7 because they exceed the maximum income allowance, or the value of their property exceeds exempted values permitted by state or federal law. Any individual or married couple whose unsecured debts do not exceed $419,275 may file a Chapter 13. Payments can range anywhere from 5% to 100% of your total unsecured debt. When the plan is completed, the unpaid balances can be wiped out.