Chapter 7 vs. Chapter 13 Bankruptcy: Which Is Right for You?

Understanding the Two Most Common Types of Bankruptcy

When people talk about personal bankruptcy, they are usually referring to Chapter 7 or Chapter 13. Both are designed to help people get relief from overwhelming debt, but they work in very different ways. Choosing the right one depends on your income, assets, the types of debt you have, and your goals for the future.

Chapter 7 bankruptcy is often called liquidation bankruptcy because it involves selling non-exempt assets to pay creditors. In practice, most Chapter 7 filers lose no assets because exemptions protect everything they own. Chapter 7 typically takes 3 to 6 months from filing to discharge.

Chapter 13 bankruptcy is a reorganization bankruptcy that sets up a 3-to-5-year repayment plan. You keep all of your assets but must commit a portion of your income to paying back creditors over the plan period. Chapter 13 is more complex and expensive than Chapter 7, but it offers certain advantages.

Income Requirements and the Means Test

The first question in choosing between Chapter 7 and Chapter 13 is whether you qualify for Chapter 7. The bankruptcy means test compares your household income to the median income in your state. If your income is below the median, you automatically qualify for Chapter 7.

If your income is above the median, the means test calculates your disposable income after allowed expenses. If your disposable income over 5 years would be less than $9,075, you may still qualify for Chapter 7. If it exceeds this threshold, the court may require you to file Chapter 13 instead.

This means test was introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to prevent high-income earners from abusing Chapter 7. However, the allowed expense deductions are generous enough that many above-median-income filers still qualify.

Asset Protection Differences

In Chapter 7, a trustee can sell any non-exempt assets to pay your creditors. If you have valuable non-exempt property like a second home, expensive jewelry, or significant home equity beyond your state exemption, you could lose those assets in Chapter 7.

Chapter 13 allows you to keep all of your assets regardless of exemption limits. Instead of liquidating assets, you pay creditors the value of your non-exempt assets through your repayment plan. This makes Chapter 13 attractive for people who have valuable property they want to protect.

Chapter 13 also offers special protections for your home if you are behind on mortgage payments. While Chapter 7 does not eliminate mortgage arrears, Chapter 13 allows you to catch up on missed payments over the life of the repayment plan while keeping your home.

Debt Discharge Comparison

Chapter 7 discharges most unsecured debts including credit card balances, medical bills, personal loans, and utility bills. Some debts are not dischargeable in any type of bankruptcy, including most student loans, recent tax debts, child support, and alimony.

Chapter 13 also discharges unsecured debts, but the amount discharged depends on how much you pay through your repayment plan. If your plan pays only 10 cents on the dollar to unsecured creditors, the remaining 90 cents is discharged at the end of the plan.

Both types of bankruptcy include an automatic stay that stops collection actions, including lawsuits, wage garnishments, and harassing phone calls from debt collectors.

Cost and Time Comparison

Chapter 7 bankruptcy typically costs $1,500 to $3,500 in attorney fees plus a $338 filing fee. The entire process usually takes 3 to 6 months. Chapter 13 is more expensive, with attorney fees ranging from $3,000 to $6,000 plus a $313 filing fee.

The longer timeline of Chapter 13 also means more ongoing costs and obligations. You must make monthly payments to the bankruptcy trustee, file annual tax returns with the court, and get court approval for certain financial decisions.

Despite the higher costs, Chapter 13 can be more affordable on a monthly basis because the repayment plan is structured around what you can actually afford.

Credit Score Impact

Both Chapter 7 and Chapter 13 negatively impact your credit score, but the duration differs. A Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. A Chapter 13 bankruptcy stays for 7 years from the filing date.

Counterintuitively, some lenders view Chapter 13 more favorably than Chapter 7 because it shows you made an effort to repay at least some of your debts. However, the practical difference is minimal since both make obtaining new credit difficult in the short term.

Regardless of which type of bankruptcy you choose, rebuilding credit afterward requires consistent, responsible financial behavior. Secured credit cards, on-time bill payments, and keeping credit utilization low are the key strategies for credit recovery.