If debt has become unmanageable, bankruptcy can provide a legal path to a fresh start. For individuals, the two most common options are Chapter 7 and Chapter 13. Both stop most collection activity and can eliminate many debts, but they work very differently. Choosing between Chapter 7 vs. Chapter 13 bankruptcy depends on your income, the property you want to keep, and the types of debt you have.
Important: This article is for informational purposes only and is not legal advice. Bankruptcy is governed by federal law, but exemptions and certain procedures depend on your state. For advice about your situation, consult a licensed bankruptcy attorney.
How Bankruptcy Works in General
Bankruptcy cases are filed in federal bankruptcy court. As soon as you file, an automatic stay generally goes into effect. The stay stops most creditors from continuing collection calls, lawsuits, wage garnishments, and foreclosures while the case is pending, with some exceptions.
Before filing, you must complete a credit counseling course from an approved provider within the 180 days before your filing date. Before receiving a discharge, you must also complete a debtor education (financial management) course.
What Is Chapter 7 Bankruptcy?
Chapter 7 is often called “liquidation” bankruptcy. A court-appointed trustee may sell nonexempt property and use the proceeds to pay creditors. Most eligible debts are then discharged, meaning you are no longer legally required to pay them.
In practice, many Chapter 7 cases are “no-asset” cases, because the filer’s property is fully protected by exemptions and nothing is sold.
Chapter 7 Eligibility: The Means Test
To qualify for Chapter 7, your income generally must pass the means test:
- Your average monthly income over the six months before filing is compared to your state’s median income for your household size.
- If you are below the median, you generally qualify.
- If you are above it, a second calculation subtracts allowed expenses to see whether you have enough disposable income to repay part of your debts. If you do, you may be steered to Chapter 13.
Chapter 7 is also unavailable if you received a Chapter 7 discharge in a case filed within the previous eight years.
Chapter 7 Timeline
A Chapter 7 case typically moves quickly. You attend a meeting of creditors (called the 341 meeting) about a month or so after filing, and the discharge is often granted roughly a few months after filing if no problems arise.
What Is Chapter 13 Bankruptcy?
Chapter 13 is a “reorganization” or “wage earner’s” bankruptcy. Instead of liquidating property, you propose a repayment plan lasting three to five years. You make monthly payments to a Chapter 13 trustee, who distributes the money to creditors. At the end of the plan, remaining eligible debts are generally discharged.
Who Uses Chapter 13?
Chapter 13 is often chosen by people who:
- Earn too much to qualify for Chapter 7
- Are behind on a mortgage and want to catch up to stop foreclosure
- Are behind on car payments and want to keep the vehicle
- Have nonexempt property they want to protect
- Have debts that cannot be discharged in Chapter 7 but can be paid over time, such as tax debts
Chapter 13 Eligibility
You need regular income to fund a plan, and your debts must fall under federal debt limits that are periodically adjusted. Plan length depends largely on income: filers below the state median often have three-year plans, while those above it commonly have five-year plans.
Chapter 7 vs. Chapter 13: Side-by-Side Comparison
| Feature | Chapter 7 | Chapter 13 |
|---|---|---|
| Type | Liquidation | Repayment plan |
| Income test | Must pass means test | Need regular income |
| Duration | Usually a few months | Three to five years |
| Property | Nonexempt property may be sold | Generally keep property while paying plan |
| Mortgage arrears | Does not let you catch up over time | Can cure arrears through the plan |
| Monthly payments | None to the trustee | Monthly plan payments |
| Credit report | Can remain up to 10 years | Can remain up to 7 years |
| Refiling waiting period | Eight years between Chapter 7 discharges | Shorter waiting periods apply |
What Debts Can Be Discharged?
Both chapters can typically discharge unsecured debts such as:
- Credit card balances
- Medical bills
- Personal loans
- Many past-due utility bills
- Deficiency balances after repossession or foreclosure
Some debts generally cannot be discharged in either chapter, including:
- Most child support and alimony
- Most recent income taxes
- Criminal fines and restitution
- Debts for death or injury caused by driving while intoxicated
- Most student loans, unless you prove undue hardship in a separate proceeding
Chapter 13 discharges a slightly broader range of debts than Chapter 7, such as certain property settlement debts from a divorce.
Protecting Your Property: Exemptions
Exemptions determine what property you can keep. Depending on your state, you may use your state’s exemption system or, in some states, choose the federal bankruptcy exemptions. Common exemptions cover:
- Equity in your home (homestead exemption)
- A vehicle up to a certain value
- Household goods and clothing
- Tools of your trade
- Most retirement accounts
Homestead exemptions vary dramatically by state, from very modest amounts to unlimited protection in a few states, subject to federal limits for recently acquired homes.
What Happens to Your House and Car?
- In Chapter 7: If you are current on your mortgage or car loan and your equity is protected by exemptions, you can often keep the property by continuing payments. If you are behind, the lender may eventually be able to foreclose or repossess.
- In Chapter 13: You can typically catch up on missed mortgage payments over the plan period. In some cases, car loans can be restructured, and certain wholly unsecured second mortgages may be removed, depending on the circumstances.
Effect on Your Credit
Bankruptcy will hurt your credit score, and a Chapter 7 can stay on your credit report for up to 10 years from filing, while Chapter 13 can remain for up to 7 years. Even so, many filers already have damaged credit from missed payments. With responsible credit use, scores can begin to recover over time after a discharge.
Alternatives to Bankruptcy
Before filing, consider whether other options might work:
- Negotiating directly with creditors
- A debt management plan through a nonprofit credit counseling agency
- Debt settlement, keeping in mind fees and tax consequences
- Consolidating debt at a lower interest rate
- Checking whether your income and assets are “judgment proof,” meaning collectors may have limited ability to collect
Choosing the Right Chapter
Talk with a bankruptcy attorney about your income, property, and goals. Many offer free consultations. Filing without help is allowed, but mistakes in paperwork or exemptions can lead to lost property or a dismissed case.
Documents You Will Need to File
Bankruptcy requires detailed financial disclosure. Before meeting with an attorney or filing, gather:
- Pay stubs or other proof of income for the six months before filing
- Recent federal and state tax returns
- A list of all creditors, with account numbers and balances
- Bank, retirement, and investment account statements
- Mortgage, car loan, and lease documents
- Vehicle titles and real estate deeds
- A list of monthly living expenses
You must list all assets and debts honestly. Hiding property or income can lead to denial of your discharge and potential criminal penalties for bankruptcy fraud.
Frequently Asked Questions
Which is better, Chapter 7 or Chapter 13?
Neither is better for everyone. Chapter 7 is faster and does not require a repayment plan, while Chapter 13 can help you keep property and catch up on missed mortgage payments.
Will I lose my house if I file for bankruptcy?
Not necessarily. In Chapter 7, you may keep it if your equity is exempt and you are current on payments. Chapter 13 lets you catch up on arrears through a plan.
Can bankruptcy eliminate student loans?
Usually not, unless you prove undue hardship in a separate court action. Recent federal guidance has made that process more accessible for some borrowers, but results vary.
How long after bankruptcy can I get credit?
Many people receive credit offers soon after discharge, though usually at higher rates. Rebuilding with secured cards and on-time payments can help over time.
Do I need a lawyer to file bankruptcy?
You can file on your own, but bankruptcy is complex. An attorney can help protect property and avoid errors that could cause your case to be dismissed.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
