Bankruptcy: Chapter 7 vs. Chapter 13 Explained
Bankruptcy has a reputation as the worst-case outcome, but it exists for a reason: to give honest people who cannot repay their debts a fresh start. For some people, filing sooner rather than later is the most sensible financial decision they can make. It is a serious step with lasting effects, so it is worth understanding exactly how it works.
Key takeaways
- Bankruptcy is a federal court process that can wipe out or restructure debts you cannot repay.
- Chapter 7 wipes out most unsecured debts in a few months, but you must pass a means test and some property may be sold.
- Chapter 13 sets up a three- to five-year repayment plan and lets you keep your property.
- Filing stops most collection activity immediately, including lawsuits and wage garnishment.
Chapter 7: liquidation
Chapter 7 is the faster and more common type of personal bankruptcy. A court-appointed trustee reviews your assets, sells any property that is not protected by exemptions and uses the proceeds to pay creditors. Most qualifying unsecured debts are then discharged, which means you no longer owe them.
Timeline
Typically about four to six months from filing to discharge.
Who qualifies
You must pass the “means test.” If your income is below your state’s median for your household size, you generally qualify. If it is above, a more detailed calculation of your disposable income decides.
Your property
State and federal exemptions protect many essentials, such as a certain amount of home equity, a vehicle, household goods and retirement accounts. In practice, many Chapter 7 filers keep all of their property.
Chapter 13: reorganization
Chapter 13 lets you keep your property while you repay part of your debts through a court-approved plan lasting three to five years. When you complete the plan, most remaining qualifying debts are discharged.
Best for
People with regular income who earn too much for Chapter 7, are behind on a mortgage or car loan and want to catch up, or have property they would lose in Chapter 7.
The plan
Your payment is based on your income, expenses and the types of debts you have.
Chapter 7 vs. Chapter 13 at a glance
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| How it works | Non-exempt assets sold, debts discharged | 3–5 year repayment plan |
| Typical length | About 4–6 months | 3–5 years |
| Income test | Must pass the means test | Need regular income |
| Keep your home? | If equity is protected by exemptions | Yes, if you keep up with the plan |
| Stays on credit report | Up to 10 years | Up to 7 years |
Debts bankruptcy usually does not wipe out
- Child support and alimony
- Most recent tax debts
- Most student loans (unless you prove "undue hardship," which is difficult but no longer impossible)
- Court fines and criminal restitution
- Debts from fraud or from injuries caused while driving under the influence
What happens when you file
- As soon as you file, an "automatic stay" goes into effect. Creditors must stop calling, stop lawsuits, stop wage garnishments and pause foreclosures.
- Before filing, you must complete a credit counseling session with an approved agency within the 180 days before your filing date, and before your debts are discharged you must complete a debtor education course.
- Court filing fees are a few hundred dollars (check the current amounts on uscourts.gov), and attorney fees vary by state and case.
Alternatives to consider first
Debt consolidation or a debt management plan
If your debts are manageable over a few years, debt consolidation or a debt management plan may solve the problem with less credit damage.
Debt settlement
If you are behind and can save a lump sum, debt settlement may work.
Being judgment proof
If your only income is protected (such as Social Security) and you have few assets, you may be "judgment proof," which means creditors may not be able to collect even if they sue.
Talk through your options before you decide
Bankruptcy is a big decision. A debt remediation specialist can help you understand whether settlement or another option could work for your situation first.
For legal advice about filing, consult a licensed bankruptcy attorney in your state.
Frequently Asked Questions
Not necessarily. In Chapter 7, you may keep your home if your equity is covered by your state's homestead exemption and you stay current on the mortgage. Chapter 13 is designed to help you keep your home and catch up on missed payments.
Chapter 7 can stay for up to 10 years and Chapter 13 for up to 7 years. Many people start rebuilding credit within a year or two of discharge.
You can, but it is risky. Mistakes can lead to a dismissed case or lost property. Many attorneys offer free consultations, and legal aid organizations can help people on low incomes.
