Chapter 7 vs. Chapter 13 Bankruptcy: What Are the Differences?
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Bankruptcy is one of the fastest and most effective ways to find debt relief. Chapter 7 and Chapter 13 are the two most common types of bankruptcy for individuals in the United States. The biggest differences are the qualifications, the way debts are repaid and how long the process takes.
When to consider Chapter 7 or Chapter 13 bankruptcy
Bankruptcy is a legal process that can provide relief if you’re struggling to repay certain debts. There are different types of bankruptcy, and Chapter 7 and Chapter 13 are the primary options for individuals.
You might consider Chapter 7 or Chapter 13 bankruptcy as an option if:
Your monthly consumer debt payments are greater than 50% of your monthly take-home pay.
You’re facing lawsuits from creditors.
You see no way to pay off your debt within five years.
Chapter 7 bankruptcy vs. Chapter 13 bankruptcy
Chapter 7 and Chapter 13 bankruptcy differ in the way debts are resolved, time to completion and eligibility requirements.
Most notably, with Chapter 13 bankruptcy, you’ll make a plan to repay all or an adjusted amount of your debts to creditors over time and will keep assets.
With Chapter 7, you won’t have to make a plan to pay back the debt, but may be required to have nonexempt assets sold and proceeds distributed to creditors. Nonexempt property can be jewelry, or the equity in your house or car if it’s higher than your state’s exemption limit. The majority of individual Chapter 7 cases, however, are “no asset” cases where there are no nonexempt items to liquidate.
Bankruptcy law is complex and the process can be difficult to navigate. You’ll want to find a qualified bankruptcy attorney to help. You can also contact a nonprofit credit counseling service for a free consultation.
The table below outlines key differences between Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 | Chapter 13 |
|---|---|
Form of bankruptcy: Liquidation. | Form of bankruptcy: Individual debt adjustment. |
Eligibility:
| Eligibility:
|
How long it takes to achieve a discharge: Usually under six months. | How long it takes to achieve a discharge: Usually three to five years, depending on the repayment plan. |
Mark on credit report: Remains on your credit report for 10 years from filing date. | Mark on credit report: Remains on your credit report for 7 years from filing date. |
Benefits:
| Benefits:
|
Drawbacks:
| Drawbacks:
|
» Learn: What is the bankruptcy means test?
Is it better to file Chapter 7 or Chapter 13?
Which form of bankruptcy is best for you depends on your financial situation and goals.
To determine whether Chapter 7 or Chapter 13 bankruptcy is right for you, consult with a bankruptcy attorney. You’ll want to ensure bankruptcy is the right solution for your debts and you're in a position to make the most of the fresh start that bankruptcy offers.
Most consumers filing for bankruptcy opt for Chapter 7
Chapter 7 bankruptcy is faster and cheaper than Chapter 13. Chapter 7 bankruptcy discharges, or erases, eligible debts such as credit card bills, medical debt and personal loans. But other debts, like student loans and taxes, typically are harder to get discharged. Chapter 7 doesn’t offer a route to get caught up on secured loan payments, like a mortgage or auto loan, and it doesn’t protect those assets from foreclosure or repossession.
In some instances, a bankruptcy trustee — an administrator who works with the bankruptcy courts to represent the debtor's estate — may sell nonexempt items, meaning belongings that are not protected during bankruptcy. Nonexempt items vary according to state law.
Higher-wage earners may choose Chapter 13
Chapter 13 bankruptcy may be better for those who don’t qualify for a Chapter 7 filing, for instance, if their income is too high. And some who qualify for Chapter 7 may still choose to file for Chapter 13 because they want to retain certain assets or get caught up on their mortgage payments. However, Chapter 13 repayment plans are challenging: All disposable income after certain allowances has to be directed toward repaying debt over three to five years.
While a bankruptcy filing stays on your credit report for up to 10 years, you can use the opportunity to make a fresh start and take immediate steps to begin rebuilding your credit.
