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Chapter 7 vs. Chapter 13 Bankruptcy: What’s the Difference?

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In a Nutshell

Chapter 7 and Chapter 13 bankruptcy are the two most common types of personal bankruptcy filings. Chapter 7 bankruptcy can wipe out unsecured debts like credit card debt and medical bills in just 3-4 months. Though the filing can stay on your credit report for 10 years. You must pass a means test and meet certain criteria to qualify for Chapter 7. Chapter 13 takes longer — usually 3-5 years — because filers are on a repayment plan. After the plan is up, any remaining unsecured debt is discharged. Chapter 7 can stay on your credit report for up to 7 years. Some filers choose Chapter 13 because they don’t qualify for Chapter 7 or because they own certain assets they want to protect. Even though there are differences between Chapter 7 and Chapter 13 bankruptcy, each one grants the filer a fresh financial start in the form of a bankruptcy discharge — a court order that relieves you of your debt and bans creditors from trying to collect from you on this debt.

Written by Attorney Andrea Wimmer
Updated July 27, 2023


What You Need To Know About Chapter 7 Bankruptcy 

Chapter 7 bankruptcy is the most common form of bankruptcy. Over 70% of all bankruptcies filed in 2022 were Chapter 7[1]. You don’t have to have a minimum amount of debt to file for Chapter 7 bankruptcy, and there’s also no maximum amount of debt. But there are some eligibility requirements. 

To qualify for Chapter 7, you must pass what’s called a means test. This test can get complicated, but generally speaking, it compares your income to the state median income to ensure you’re within the income limit

Chapter 7 tends to be the fastest of all bankruptcy chapters for getting rid of your debt. Most filers get a bankruptcy discharge within 3-4 months of filing their bankruptcy petition with the U.S. bankruptcy court. 

Under Chapter 7, your bankruptcy trustee can sell any personal property you own that isn’t protected by bankruptcy exemptions in order to repay your credits. In practice, the vast majority of filers keep all their personal property. It’s quite uncommon for Chapter 7 filers to have their property sold.

Should I File Chapter 7 Instead of Chapter 13? 

Individuals who meet the following criteria often choose to file Chapter 7 instead of Chapter 13:

  • You only have unsecured debt (credit card debt, medical bills, etc.)

  • You don’t have a regular income or you don’t have enough income to cover your living expenses (housing, food, etc.)

  • You can’t afford to hire a bankruptcy lawyer 

  • You don’t have any non-dischargeable debts (alimony, child support, etc.), or you’re current with your payments if applicable 

  • You’re not able to commit to a repayment plan for at least the next three years

That said, only you can determine which chapter is best for you. You can use our free screener to see if you’re eligible for free help filing your Chapter 7 case. You can also schedule a free consultation with a bankruptcy attorney to talk about your options.

Note: If you have federal student loans, you may be able to discharge them through Chapter 7 due to new guidance from the U.S. Department of Education and Department of Justice. To learn more check out our popular article on how to discharge student loans in bankruptcy.

The Downsides of Filing Chapter 7 Bankruptcy

When choosing which type of bankruptcy to file, it is important to look at all sides. This includes considering the possible drawbacks and limitations. Here are some drawbacks of Chapter 7:

The Bankruptcy Trustee Can Sell Any Property That’s Not Protected by an Exemption

Bankruptcy exemptions protect most basic property (clothing, furniture, retirement accounts, and, up to a certain amount, cars.) However, personal property classified as “nonexempt property” can be seized and sold by the bankruptcy trustee. Remember, in practice this is incredibly rare. Still, if your property isn’t protected by an exemption, it can happen.

Each state has its own rules on what property is considered exempt and nonexempt. If you own nonexempt property and don’t want it to be used to pay your debts, a Chapter 7 liquidation bankruptcy may not be right for you. 

Chapter 7 Doesn’t Help With Expensive Car Loans (if You Want To Keep the Car)

Even though bankruptcy law allows you to keep your car, even if it is not paid off yet, you’ll likely be stuck with the same car loan. After signing a reaffirmation agreement, most Chapter 7 filers are stuck with the same high interest rate on their loan and often owe much more on it than the car is worth. This can put filers right back into a difficult financial position if they’re not careful.

Chapter 7 Doesn’t Help With Most Non-Dischargeable Debt or Past-Due Mortgage Payments

Much like a car loan, if you owe non-dischargeable debt (like tax debt), filing Chapter 7 will not help address these debts. Also, if you own a home but have fallen behind on your mortgage payments, filing Chapter 7 bankruptcy may not be the best idea. This can get complicated, but you can learn more in this article: How Can I File Chapter 7 and Keep My House?

Chapter 7 Stays on Your Credit Report Longer Than Chapter 13

Although you can start rebuilding your credit as soon as your discharge is entered, the fact that you filed Chapter 7 bankruptcy will stay on your credit report for 10 years

While this is a big deterrent for a lot of folks considering bankruptcy, remember that missing payments, having debts sent to collections, or having a car repossessed will also hurt your credit. These events are common for folks who are struggling financially. 

When you’re weighing filing or not filing, keep in mind how different events will affect your credit score. Also remember, no matter what is on your credit report, you can rebuild your credit and get your score up, and it might not take as long as you think.

You May Not Qualify To File Chapter 7 Due to the Income Limit

If you have disposable income and you can’t pass the means test, you may not be eligible to file bankruptcy under Chapter 7. While that may be less of a downside and more of a limitation on your bankruptcy options, it’s important to understand how this part of the Bankruptcy Code affects you. 

If your household income exceeds your state’s median income, bankruptcy law requires you to show that you don’t have the disposable income necessary to commit to a Chapter 13 repayment plan.

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What You Need To Know About Chapter 13 Bankruptcy

Chapter 13 is the second most common type of bankruptcy. In 2022, about 25% of all bankruptcies were filed under Chapter 13[1]. The Bankruptcy Court sets a maximum amount of debt for Chapter 13 filings. You can only file Chapter 13 if your debt is less than $2,750,000[3]. This may seem high to some, but remember it includes both secured debts — like a mortgage or car loan — and unsecured debts  — like credit card debt, medical bills, personal loans.

Chapter 13 bankruptcy is also called a “reorganization bankruptcy” because the filer (usually with the help of a lawyer) proposed a 3-5 year repayment plan. So their debts are first “reorganized” into a more manageable monthly payment. After the 3-5 years are up, if the filer has made all payments as promised in the plan, their remaining eligible debt is discharged.

Creditors can object to how much they get under the Chapter 13 plan but once the bankruptcy court approves it, they are bound to the monthly payment plan. Since creditors receive some money in a Chapter 13 bankruptcy, debtors are not required to give up any nonexempt property.

Finally, Chapter 13 is typically removed from your credit history after seven years. So three of the big differences between Chapter 13 and Chapter 7 are:

  • The types of debts you can include in your case

  • How long it takes to wipe out your debts

  • How long the filing stays on your credit report

Should I File Chapter 13 Instead of Chapter 7? 

Individuals who meet the following criteria often choose to file Chapter 13 instead of Chapter 7:

  • You want to keep property that’s not protected by an exemption 

  • You’re behind on your mortgage and want to avoid foreclosure (or you have multiple mortgages)

  • You have a car loan with a high interest rate or negative equity from a trade-in

  • You have non-dischargeable debt 

  • You owe money to your ex-spouse from a property settlement

The Downsides of Chapter 13 bankruptcy

Even if you pass the means test and have the option to choose between the two types of bankruptcy, make sure to consider the drawbacks to Chapter 13 bankruptcy. Here are some things to consider:

Chapter 13 Is a 3-5 Year Commitment 

This may not be a drawback for all filers, but keep in mind that your Chapter 13 repayment plan has to be at least three years long and sometimes will be up to five years long. 

That means the debtor has to make at least 36 monthly payments to the bankruptcy trustee. You will only get your discharge if you successfully complete your repayment plan so commitment to your payment plan is crucial. 

The Bankruptcy Trustee Will Monitor Your Income 

You’ll have to send a copy of your income tax return to the Chapter 13 bankruptcy trustee each year while your bankruptcy case is open. Also, if you get a tax refund you may have to pay that refund to your unsecured creditors in addition to your regular monthly plan payments. 

Successful Cases Usually Require Hiring a Bankruptcy Attorney 

Even though you don’t have to hire a bankruptcy lawyer, almost all Chapter 13 bankruptcy cases filed “pro se” (without a lawyer) fail. The Bankruptcy Code’s requirements for the repayment plan and the entire Chapter 13 process are virtually impossible to get right by yourself. 

The average Chapter 13 bankruptcy will cost about $3,000 in attorney fees. 

Chapter 13 Has a High Failure Rate

Even when a bankruptcy attorney is helping, many Chapter 13 bankruptcy cases fail because there is a 3-5 year repayment plan and a lot can happen during that time. Whether it’s an unexpected layoff, illness, divorce, etc., sticking to a Chapter 13 budget can prove to be quite difficult. 

Chapter 7 vs. Chapter 13: Quick Summary

When deciding between Chapter 7 vs. Chapter 13 bankruptcy, it’s important to consider: 

  • The types of debt you have: 

    • Unsecured vs secured debt, dischargeable debt vs non-dischargeable debt 

  • How long you would want the filing to stay on your credit report

    • 10 years (Chapter 7) vs 7 years (Chapter 13)

  • If your personal property would be considered a nonexempt asset 

  • If your regular monthly income is enough to cover your living expenses

Bankruptcy can be a powerful debt relief tool and has helped many thousands of families get back on their feet. Don’t be discouraged or embarrassed by the idea of filing bankruptcy — bankruptcy laws exist to give you a fresh start. There’s no shame in using this legal tool.

You may even consider signing up for a free credit counseling session to learn more. 

Upsolve May Be Able To Help With Your Chapter 7 Case

If you’re thinking of filing Chapter 7 bankruptcy, see if you qualify to use our free web app. Our team of experts can help guide you through the bankruptcy process, free of charge. 

Our filing tool can help you prepare and file your Chapter 7 bankruptcy forms all on your own for free

Additional Reading:


Sources:

  1. U.S. Courts. (n.d.). Bankruptcy Statistics and Data from U.S. Bankruptcy Courts. Retrieved April 27, 2023, from https://www.uscourts.gov/statistics-reports/analysis-reports/bankruptcy-filings-statistics/bankruptcy-statistics-data
  2. U.S. Courts. (n.d.). Bankruptcy Statistics and Data from U.S. Bankruptcy Courts. Retrieved April 27, 2023, from https://www.uscourts.gov/statistics-reports/analysis-reports/bankruptcy-filings-statistics/bankruptcy-statistics-data
  3. U.S. Bankruptcy Courts. (n.d.). Chapter 13 - Bankruptcy Basics - Max Filing Amt. Chapter 13 - Bankruptcy Basics. Retrieved from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics#:~:text=Any%20individual%2C%20even%20if%20self,U.S.C.%20%C2%A7%20109(e)

Written By:

Attorney Andrea Wimmer

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Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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