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

The distinction between Chapter 7 and Chapter 13 bankruptcy lies primarily in the approach each takes towards debt resolution. Chapter 7 bankruptcy is characterized by the liquidation of a debtor's non-exempt assets. This means that assets that are not protected by exemptions can be sold by the bankruptcy trustee to pay off creditors. Individuals who qualify for Chapter 7 typically have limited income and are unable to repay their debts.

In contrast, Chapter 13 bankruptcy focuses on debt reorganization. It allows individuals with a regular income to propose a repayment plan to creditors, allowing them to pay off their debts over a period of three to five years. This enables debtors to retain their assets while making manageable payments towards their debt, effectively reorganizing rather than liquidating.

Thus, the correct answer highlights that Chapter 7 is about liquidating assets to settle debts, while Chapter 13 is about reorganizing debt through a structured plan for repayment. This fundamental difference underscores the unique objectives and processes involved in each bankruptcy type, addressing distinct situations faced by individuals experiencing financial difficulties.