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

The distinction between Chapter 7 and Chapter 13 bankruptcy lies primarily in the treatment of assets and the repayment of debts. Chapter 7 bankruptcy, often referred to as "liquidation bankruptcy," involves the selling of non-exempt assets to pay off creditors. In this process, a bankruptcy trustee is appointed to oversee the liquidation of these assets, and the proceeds are distributed to creditors. However, certain assets may be exempt, allowing individuals to retain essential items.

On the other hand, Chapter 13 bankruptcy is known as "reorganization bankruptcy." It enables individuals with a regular income to create a repayment plan to pay back all or part of their debts over a period of three to five years. During this time, debtors can generally keep their assets, provided they adhere to the terms of the repayment plan. This flexibility is beneficial for those who have valuable assets they wish to retain, such as a home or a vehicle.

Thus, the key difference highlighted in the correct answer emphasizes the contrast in asset retention and how debt repayment is structured under each bankruptcy type.