Chapter 7 vs. Chapter 13 Bankruptcy: Which One Is Right for You?
Chapter 7 bankruptcy eliminates unsecured debts in 3-4 months but stays on your credit report for 10 years. Chapter 13 requires a 3-5 year repayment plan but is removed from your credit after 7 years. Choose Chapter 7 if you lack disposable income and want fast debt relief, or Chapter 13 if you need to protect assets or catch up on mortgage payments.
Get Free ConsultationYou have two main paths when filing personal bankruptcy: Chapter 7 and Chapter 13. Each offers a fresh financial start through a bankruptcy discharge. The court order wipes out eligible debts and stops creditors from collecting. But the paths work very differently.
Chapter 7 bankruptcy eliminates unsecured debts in just 3-4 months. Credit card balances and medical bills disappear quickly. The filing stays on your credit report for 10 years. You must pass a means test to qualify.
Find Out Which Bankruptcy Chapter Fits Your Situation
A bankruptcy attorney can review your income, debts, and assets to determine whether Chapter 7 or Chapter 13 protects your interests best. Get a free consultation today.
Speak With Attorney NowChapter 13 takes 3-5 years because you follow a repayment plan. After completing the plan, remaining unsecured debt gets discharged. The filing stays on your credit report for 7 years. Many filers choose Chapter 13 to protect certain assets or because they don’t qualify for Chapter 7.
What You Need To Know About Chapter 7 Bankruptcy
Chapter 7 is the most common bankruptcy type. Over 70% of all bankruptcies filed in 2022 were Chapter 7. You don’t need a minimum debt amount to file. No maximum debt limit exists either.
But you must meet eligibility requirements. You need to pass a means test that compares your income to your state’s median income. The test ensures you fall within the income limit.
Chapter 7 works fastest for eliminating debt. Most filers get their bankruptcy discharge within 3-4 months of filing. Your bankruptcy trustee can sell personal property not protected by bankruptcy exemptions. The proceeds go to creditors.
In practice, the vast majority of filers keep all their property. Having property sold is quite uncommon in Chapter 7 cases.
Should You File Chapter 7 Instead of Chapter 13?
Consider Chapter 7 if you meet these criteria:
- You only have unsecured debt like credit cards and medical bills
- You lack regular income or can’t cover basic living expenses
- You can’t afford to hire a bankruptcy lawyer
- You don’t have non-dischargeable debts or you’re current on those payments
- You can’t commit to a repayment plan for three years
Federal student loans may now be dischargeable through Chapter 7. New guidance from the U.S. Department of Education and Department of Justice changed the rules.
The Downsides of Filing Chapter 7 Bankruptcy
Every bankruptcy option has tradeoffs. Understanding the drawbacks helps you make the right choice.
The Trustee Can Sell Unprotected Property
Bankruptcy exemptions protect most basic property. Clothing, furniture, retirement accounts, and cars up to a certain value are safe. But nonexempt property can be seized and sold by the trustee. Each state has different rules on exempt versus nonexempt property.
In practice, property sales are incredibly rare. But if you own valuable nonexempt assets, Chapter 7 liquidation may not work for you.
Chapter 7 Doesn’t Help With Expensive Car Loans
You can keep your car even if you still owe money. But you’ll likely stay stuck with the same loan terms. After signing a reaffirmation agreement, most Chapter 7 filers keep the high interest rate. Many owe more than the car is worth. Poor loan terms can put you right back in financial trouble.
Chapter 7 Doesn’t Address Non-Dischargeable Debt
Filing Chapter 7 won’t help with non-dischargeable debt like taxes. If you own a home and fell behind on mortgage payments, Chapter 7 may not be your best option either.
Chapter 7 Stays on Your Credit Report for 10 Years
You can start rebuilding credit immediately after discharge. But the Chapter 7 filing remains on your credit report for 10 years. Many people find this fact discouraging.
Remember that missed payments also hurt your credit. Debts sent to collections damage your score. Car repossessions leave marks too. Financial struggles cause credit damage whether you file bankruptcy or not.
You can rebuild your credit no matter what appears on your report. our partner Kikoff helps people improve their credit scores faster than expected.
You May Not Qualify Due to Income Limits
You may not be eligible for Chapter 7 if you can’t pass the means test. If your household income exceeds your state’s median income, you must prove you lack disposable income. Without that proof, you can’t file Chapter 7.
What You Need To Know About Chapter 13 Bankruptcy
Chapter 13 is the second most common bankruptcy type. About 25% of all bankruptcies filed in 2022 were Chapter 13. You can only file if your debt is less than $2,750,000. That includes secured debts like mortgages and car loans plus unsecured debts.
Chapter 13 is called a reorganization bankruptcy. You propose a 3-5 year repayment plan, usually with a lawyer’s help. Your debts get reorganized into manageable monthly payments. After completing the plan, remaining eligible debt gets discharged.
Creditors can object to the payment amounts. But once the bankruptcy court approves your plan, creditors must accept it. Since creditors receive some money in Chapter 13, you don’t give up nonexempt property.
Chapter 13 is removed from your credit history after seven years. Three big differences between Chapter 13 and Chapter 7 are:
- The types of debts you can include
- How long it takes to eliminate debts
- How long the filing stays on your credit report
Should You File Chapter 13 Instead of Chapter 7?
Consider Chapter 13 if you meet these criteria:
- You want to keep property that’s not protected by exemptions
- You’re behind on your mortgage and want to avoid foreclosure
- You have a car loan with high interest or negative equity
- You have non-dischargeable debt
- You owe money to your ex-spouse from a property settlement
The Downsides of Chapter 13 Bankruptcy
Chapter 13 has drawbacks even if you pass the means test. Consider these factors carefully.
Chapter 13 Is a 3-5 Year Commitment
Your Chapter 13 repayment plan lasts at least three years. Some plans extend to five years. You must make at least 36 monthly payments to the bankruptcy trustee. You only get your discharge after successfully completing the plan. Commitment to your payment schedule is crucial.
The Trustee Will Monitor Your Income
You must send your income tax return to the Chapter 13 trustee each year. Your bankruptcy case stays open throughout the repayment period. If you get a tax refund, you may have to pay it to unsecured creditors. That comes in addition to your regular monthly plan payments.
Successful Cases Usually Require a Bankruptcy Attorney
You don’t have to hire a bankruptcy lawyer. But almost all Chapter 13 cases filed without a lawyer fail. The repayment plan requirements are virtually impossible to get right by yourself. The average Chapter 13 bankruptcy costs about $3,000 in attorney fees.
Chapter 13 Has a High Failure Rate
Many Chapter 13 cases fail even with an attorney’s help. The 3-5 year repayment period is long. Unexpected layoffs happen. Illness strikes. Divorces occur. Sticking to a Chapter 13 budget proves quite difficult for many people.
Chapter 7 vs. Chapter 13: Quick Summary
When deciding between Chapter 7 and Chapter 13 bankruptcy, consider these factors:
- The types of debt you have (unsecured vs secured, dischargeable vs non-dischargeable)
- How long you want the filing on your credit report (10 years for Chapter 7, 7 years for Chapter 13)
- Whether your personal property is nonexempt
- Whether your regular monthly income covers living expenses
Bankruptcy is a powerful debt relief tool. It has helped thousands of families get back on their feet. Don’t feel discouraged or embarrassed about filing bankruptcy. Bankruptcy laws exist to give you a fresh start. No shame comes with using this legal tool.
You can speak with a bankruptcy attorney for free to learn which chapter suits your situation best.
Getting Help With Your Bankruptcy Case
Making the right choice between Chapter 7 and Chapter 13 affects your financial future. A bankruptcy attorney can review your specific situation. They’ll help you understand which option protects your interests best.
Chapter 7 offers fast debt relief if you qualify. Chapter 13 provides debt reorganization if you have steady income. Both paths lead to a discharge that eliminates eligible debts.
Your financial situation is unique. Your debt types, income level, and assets all matter. Professional guidance helps you navigate the bankruptcy process successfully.