Filing for bankruptcy is a significant financial decision that can provide relief for those overwhelmed by debt. The two most common types of personal bankruptcy in the United States are Chapter 7 and Chapter 13. Each offers different approaches to debt relief with distinct qualifications, processes, and outcomes. Understanding these differences is crucial for making an informed decision about which option may be right for your situation.
Chapter 7 Bankruptcy: Liquidation
Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy” because it involves selling certain assets to pay creditors before discharging remaining eligible debts.
Eligibility Requirements
- Means Test: You must pass a means test, which compares your income to the median income in your state. If your income is below the median, you automatically qualify. If it’s above, a more detailed calculation determines eligibility.
- Previous Bankruptcies: You cannot file for Chapter 7 if you received a discharge in a previous Chapter 7 case within the last eight years or a Chapter 13 discharge within the last six years.
- Credit Counseling: You must complete credit counseling from an approved agency within 180 days before filing.
The Process
- Filing the Petition: Submit bankruptcy forms, financial statements, proof of income, tax returns, and pay the filing fee (approximately $335, though fee waivers are available).
- Automatic Stay: Upon filing, an automatic stay goes into effect, stopping most collection actions.
- Trustee Assignment: The court appoints a trustee to oversee your case.
- Meeting of Creditors: Approximately 30 days after filing, you attend a meeting where the trustee and creditors can ask questions about your finances and property.
- Asset Evaluation: The trustee determines which assets are exempt (protected) and which can be sold to pay creditors.
- Liquidation: Non-exempt assets are sold, and proceeds are distributed to creditors.
- Discharge: Typically 3-4 months after filing, eligible debts are discharged (legally eliminated).
Pros and Cons
Pros:
- Quick process (typically 3-6 months)
- Most unsecured debts discharged completely
- No repayment plan required
- Keep future income and assets acquired after filing
Cons:
- Non-exempt assets may be sold
- Impact on credit score (remains on credit report for 10 years)
- Not all debts are dischargeable
- May lose property with secured loans
Chapter 13 Bankruptcy: Reorganization
Chapter 13 bankruptcy is known as “reorganization bankruptcy” or a “wage earner’s plan.” It allows individuals with regular income to develop a plan to repay all or part of their debts over three to five years.
Eligibility Requirements
- Regular Income: You must have sufficient regular income to make payments under a repayment plan.
- Debt Limitations: Unsecured debts must be less than $465,275 and secured debts less than $1,395,875 (figures adjust periodically).
- Tax Filings: You must be current on tax filings.
- Previous Bankruptcies: Cannot file if you received a discharge in a Chapter 13 case within the last two years or a Chapter 7 case within the last four years.
- Credit Counseling: Required within 180 days before filing.
The Process
- Filing the Petition: Submit bankruptcy forms, financial documents, and pay the filing fee (approximately $310).
- Automatic Stay: Collection activities stop.
- Repayment Plan Submission: Within 14 days of filing, you must submit a repayment plan.
- Trustee Assignment: A trustee is appointed to collect payments and distribute them to creditors.
- Meeting of Creditors: Similar to Chapter 7, you attend a meeting to answer questions about your finances.
- Confirmation Hearing: The court holds a hearing to approve or reject your repayment plan.
- Plan Execution: You make payments to the trustee for 3-5 years.
- Discharge: After completing all payments, remaining eligible debts are discharged.
What Gets Discharged
After completing your repayment plan, you may receive a discharge of:
- Remaining unsecured debts included in the plan
- Some debts that aren’t dischargeable in Chapter 7
- Certain lien stripping in some cases
What Doesn’t Get Discharged
- Most student loans
- Child support and alimony
- Most tax debts (though some can be paid through the plan)
- Debts from fraud or willful/malicious acts
Pros and Cons
Pros:
- Keep your property, including non-exempt assets
- Option to catch up on missed mortgage or car payments
- Protect co-signers through the co-debtor stay
- Ability to include certain tax debts in the repayment plan
- Less severe impact on credit (remains on report for 7 years)
- Can include cramdown provisions for certain secured debts
Cons:
- Longer process (3-5 years)
- Must make regular payments
- Living on a court-supervised budget
- Must use disposable income for debt repayment
- More expensive in attorney fees than Chapter 7
Key Differences at a Glance
| Factor | Chapter 7 | Chapter 13 |
| Process Type | Liquidation | Reorganization |
| Timeline | 3-6 months | 3-5 years |
| Property Treatment | Non-exempt property may be sold | Keep all property while making payments |
| Income Requirement | Must pass means test (limited income) | Must have regular income sufficient for payments |
| Credit Report Impact | 10 years | 7 years |
| Best For | Low income, few assets, mostly unsecured debt | Higher income, valuable assets, behind on secured debt |
| Debt Limits | No debt limits | Yes ($465,275 unsecured, $1,395,875 secured) |
| Mortgage/Car Loans | Can surrender or reaffirm, but can’t catch up through bankruptcy | Can catch up on past-due payments through the plan |
Which Type Is Right for You?
Chapter 7 might be better if:
- Your income is limited
- You have mostly unsecured debts
- You don’t own many valuable assets
- You need quick debt relief
- You can’t commit to a long-term repayment plan
Chapter 13 might be better if:
- You have a regular income
- You want to keep non-exempt property
- You’re behind on mortgage or car payments and want to avoid foreclosure/repossession
- You have tax debts or other non-dischargeable debts
- You have secured debts that exceed the value of the collateral
The Role of Bankruptcy Attorneys
While it’s possible to file for bankruptcy without an attorney (pro se), the process is complex and mistakes can be costly. Most experts recommend consulting with a bankruptcy attorney who can:
- Help determine which chapter is right for your situation
- Ensure all paperwork is filed correctly and on time
- Represent you at meetings and hearings
- Advise on property exemptions
- Help create a feasible Chapter 13 repayment plan
- Address creditor objections
Long-Term Considerations
Regardless of which type of bankruptcy you choose, consider these long-term factors:
- Credit Impact: Your credit score will be affected, though you can begin rebuilding credit after discharge.
- Future Borrowing: Obtaining loans may be more difficult and expensive for several years.
- Employment: Some employers check credit reports for certain positions.
- Housing: Bankruptcy may affect rental applications or mortgage applications.
- Insurance: Some insurance companies consider credit in determining premiums.
Making the Right Choice
Both Chapter 7 and Chapter 13 bankruptcy offer legitimate paths to debt relief, but they work in fundamentally different ways. Chapter 7 provides a fresh start through liquidation and is typically faster, while Chapter 13 offers a structured repayment plan that allows you to keep your assets.
Remember that bankruptcy is designed as a financial remedy for honest but unfortunate debtors — not as a financial planning tool. Explore all debt relief options before filing, including debt consolidation, debt settlement, and credit counseling.
