For our purposes, the first point to understand is that these chapters primarily apply to individuals seeking protection from foreclosure and all other creditor actions.

The main distinction between a petition filed under Chapter 7 of the Bankruptcy Code and under Chapter 13 is that a Chapter 7 case is a complete liquidation and discharge of all unsecured debts (for persons and companies), while a Chapter 13 puts forth a payment plan of the unpaid debts (for individuals only).

A Chapter 7 case is very good for those folks who have a lot of delinquent credit cards, medical bills and other unsecured debts, but little or no nonexempt property. Both types of bankruptcies protect the debtor’s homesteaded house and land, one vehicle, retirement account, life insurance, one shotgun, a mule and other personal property. However, when a debtor has more property than which can be protected under state or federal statutes and Constitution, then the debtor will be forced to turn over that property to the trustee. The trustee will then sell the nonexempt property and use the proceeds to pay-off the creditors, but only after a fee has been held back for his/her services, of course.

A Chapter 13 case is usually seen more favorably by creditors because the debtor, with the assistance of an experienced attorney, proposes a monthly payment plan of 3 to 5 years to pay-off all debts, both secured and unsecured. Naturally, most plans may pay only a fraction of the outstanding unsecured debt, but a Chapter 13 is much more favorable for the debtor with nonexempt property. For instance, a debtor under Chapter 13 with a lakeside vacation house may actually be able to keep that extra property, which would not be the situation under Chapter 7.

As one may be able to realize, all those past due credit cards and unpaid lines of credit really get zapped in either bankruptcy. Well, the credit card industry and their banks had enough of that and after nearly 20 years of lobbying got their pro-business buddies in Washington to pass some substantive changes that took effect in October 2005. The most significant was the installation of a “means test” that basically limits those who are able to file under Chapter 7 based on the debtor’s income. Thus a single person household with an income above the calculated and adjusted annual median income ($38,458.00 for Texas as of June 2006) cannot file a Chapter 7, but must file their bankruptcy under Chapter 13.

Remember that approximately 85% of all bankruptcies are caused by excessive medical bills, so either Chapter is quite beneficial to the consumer’s financial and personal health and well-being.