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When Is Chapter 7 Bankruptcy Better Than Chapter 13 Bankruptcy?

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In a Nutshell

Chapter 7 and Chapter 13 bankruptcy can both provide debt relief, but they have different timelines and eligibility requirements. People who have a lot of unsecured debt and don't make too much income to qualify often choose to file Chapter 7. People who make too much income to qualify for Chapter 7 or who own secured property like a home or car may file Chapter 13 instead.

Written by Attorney Eva Bacevice
Updated June 29, 2022


Debt relief comes in many forms, and there’s no one-size-fits-all solution. The best way to find the right approach for your financial situation is to educate yourself. While many people think of bankruptcy as a single option, Chapter 7 and Chapter 13 bankruptcy are very different solutions. In this article, we’ll explain the differences and the factors that can help you determine which type of bankruptcy would be best for you. 

Chapter 7 vs. Chapter 13 Bankruptcy

Both types of bankruptcy are intended to help people who are struggling financially get back on track. But they work very differently and solve different problems. 

What’s the Same About Chapter 7 and Chapter 13? 

Both Chapter 7 bankruptcy and Chapter 13 bankruptcy can help people with unmanageable debt take control of their finances. Both require you to complete a credit counseling session before filing and a financial education course later in the process. Both usually offer the protection of an automatic stay, which stops collection actions right after you file your bankruptcy petition.

Both Chapter 7 and Chapter 13 can eliminate unsecured debt through an order called a discharge. But the discharge process and the amount of debt that can be discharged differ. Both types of filings appear on your credit report, but Chapter 13 bankruptcy is listed for seven years and Chapter 7 bankruptcy for 10. Despite that, with either chapter, you can begin to rebuild your credit right away. If successfully completed, both bankruptcy chapters end with a court order that tells creditors they can never try to collect the discharged debt. 

What’s Different Between Chapter 7 and Chapter 13? 

Chapter 7 bankruptcy is a relatively short process designed to wipe out unsecured debt. Unsecured debt includes debts such as credit card balances, medical bills, unsecured personal loans, payday loans, old utility bills, and similar debts. Chapter 7 is sometimes called “fresh start bankruptcy” because unsecured debt may be resolved in a matter of months. 

Chapter 13 bankruptcy involves a 3-5 year repayment plan. Debtors in Chapter 13 pay some or all of their debts through the plan. One big benefit of Chapter 13 is that the repayment plan can also be used to manage secured debt, such as mortgage debt and car loans. Filers make set monthly plan payments to cover past-due balances. As long as they follow the rules and make payments on time, the automatic stay continues to protect them from collection action.

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Chapter 7 Bankruptcy Eligibility

Congress wanted to make sure that people who discharged unsecured debts in Chapter 7 bankruptcy really needed the help. So, in 2005, they added a means test to the U.S. Bankruptcy Code. Only Chapter 7 filers have to pass the means test. 

The first step is to compare your income to the median income for a household of the same size in the same state. If your income is below the median, you pass and the test stops there. If your income is above the median, you do a second, more complicated step to determine how much debt you could afford to pay. Most people who want to file for Chapter 7 bankruptcy qualify. If you don’t qualify, you may be able to file Chapter 13.

If you’ve filed Chapter 7 bankruptcy before and received a discharge, you must wait for eight years before you can file Chapter 7 again. The waiting period is different if you’ve previously filed Chapter 13 or if you’re planning to file Chapter 13 this time around.

Why Some Debtors Choose Chapter 7

Chapter 7 bankruptcy offers a relatively quick solution. Often, a Chapter 7 bankruptcy case can be completed in less than six months. Chapter 7 wipes out unsecured debt. That means it can be a full debt solution for someone whose main problem is credit card debt, medical debt, or other unsecured debt. Also, there is no minimum debt amount or maximum debt limit to file Chatper 7 like there is in Chapter 13.

Why Chapter 7 Isn’t Right for Everyone

Some people don’t qualify for Chapter 7 because their income is too high. But that’s not the only reason some people choose another solution. Chapter 7 bankruptcy is great for discharging unsecured debts, but you can’t discharge secured debts, like a home or car loan, without giving up the property.

Also, Chapter 7 may not be the right choice for a debtor who has nonexempt assets and wants to keep them. Chapter 7 is sometimes described as “liquidation bankruptcy” because the bankruptcy trustee can take nonexempt assets and sell them to help pay creditors. Most people who choose Chapter 7 don’t have any nonexempt property and don’t lose anything in bankruptcy. But you should look into what assets you have before making a choice. 

Bankruptcy exemptions differ from state to state but usually protect things like: 

  • A certain amount of equity in your home

  • A certain amount of value in your vehicle

  • Work tools

  • Certain types of retirement accounts

  • Household goods up to a certain value

Chapter 13 Bankruptcy Eligibility

Your income plays a role in qualifying for Chapter 13 bankruptcy. But the analysis is very different from the Chapter 7 means test. While Chapter 7 requires you to show that you can’t afford to pay your debts, Chapter 13 requires you to show that you can. A Chapter 13 case is built around a repayment plan, which must be confirmed by the bankruptcy court. The court won’t confirm a plan unless the debtor shows that they’ll be able to keep up with plan payments while paying their current bills. 

The amount of debt you can include in a Chapter 13 plan is also capped. The limits change every three years, on April 1. [1]

  • No more than $465,275 in unsecured debt, and

  • No more than $1,395,875 in secured debt

Those sound like pretty big numbers, but, in some areas of the country, mortgage debt may easily tip secured debt over the line. 

Why Some Debtors Choose Chapter 13

Some people file for Chapter 13 bankruptcy because they aren’t eligible for Chapter 7. Others choose Chapter 13 because they have nonexempt property they want to keep or because they need to resolve secured debt through bankruptcy. Some people even choose Chapter 13 because they want to pay back their debts if they can, and Chapter 13 makes that possible. 

Why Chapter 13 Isn’t Right for Everyone

The 3-5 year repayment plan means that Chapter 13 cases take much longer to resolve. Depending on your income and the amount and type of debt you have, you may end up paying some debt that could have been discharged in a Chapter 7 case. Sticking with monthly payments for three to five years on top of regular living expenses can be tough, and not everyone successfully completes the Chapter 13 plan. 

Let’s Summarize…

Chapter 7 bankruptcy and Chapter 13 bankruptcy can both be powerful tools for people who are carrying too much debt. Chapter 7 is quicker and many people with a lot of unsecured debt like credit card or medical debt choose to use it. Though there are no debt limits when filing Chapter 7, there are income limits. While Chapter 13 takes longer because of the 3-5 year repayment plan, some people choose this route because it allows them to keep property that’s not propected by exemptions or to catch up on payments for their home or car.

If you're unsure about what’s best for you, you may want to talk with an experienced bankruptcy attorney in your area. You can also see if you qualify to use our free filing tool for Chapter 7 bankruptcy.


Sources:

  1. Administrative Office of the U.S. Courts. (2022, June). Chapter 13 - Bankruptcy Basics. Administrative Office of the U.S. Courts. Retrieved June 29, 2022, from https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

Written By:

Attorney Eva Bacevice

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Eva G. Bacevice graduated from the University of Michigan Law School in 2001. She practiced law for close to a decade in the area of consumer bankruptcy. She now works in higher education as an Academic Advisor for undergraduate students at the Stephen M. Ross School of Business,... read more about Attorney Eva Bacevice

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