Chapter 7 vs. Chapter 13: Which Bankruptcy Is Better?
Navigate personal bankruptcy options. Understand the core differences between Chapter 7 and Chapter 13 to choose the best path for your debt relief.
Bankruptcy offers a legal pathway for individuals to address overwhelming financial burdens. Under U.S. law, two common types of personal bankruptcy are available: Chapter 7 and Chapter 13. This article explores their distinct characteristics to help individuals understand their differences.
Chapter 7 Fundamentals
Chapter 7 bankruptcy, a liquidation bankruptcy, aims to discharge most unsecured debts for individuals. A court-appointed trustee gathers and sells the debtor’s non-exempt assets, distributing the proceeds to creditors. Exempt assets, protected by law, generally include necessary items like clothing, household goods, and a portion of equity in a home or vehicle.
To qualify for Chapter 7, individual debtors must pass a “means test,” which assesses whether their income is low enough to be eligible. The test compares the debtor’s average monthly income over the six calendar months prior to filing with the median income for a household of similar size in their state. If the income falls below this median, the debtor typically qualifies.
If a debtor’s income exceeds the state median, the means test proceeds to a second step, analyzing their disposable income after deducting allowed expenses. This step determines if they have sufficient income to repay a meaningful portion of their debts through a Chapter 13 plan. If not, they may still qualify. Chapter 7 cases often conclude within three to six months. Debts commonly discharged include credit card debt, medical bills, and personal loans, while certain obligations like most student loans, recent taxes, and child support generally are not.
Chapter 13 Fundamentals
Chapter 13 bankruptcy, a reorganization or “wage earner’s plan” bankruptcy, allows individuals with a regular income to repay all or a portion of their debts through a structured plan. This court-approved repayment plan typically spans three to five years. Debtors generally retain all their assets, including secured property like homes and cars, as long as they adhere to the plan payments.
Debtors must demonstrate sufficient and regular income to fund the proposed repayment plan. There are specific debt limits for Chapter 13; as of April 1, 2025, unsecured debts must be less than $526,700 and secured debts less than $1,580,125. These limits are subject to periodic adjustments.
The Chapter 13 repayment plan allows debtors to address various types of debt, including curing arrears on secured debts like mortgages or car loans. While the plan is in effect, collection efforts from creditors are prohibited. After completing all payments under the plan, any remaining dischargeable unsecured debts are eliminated.
Distinctions Between Chapter 7 and Chapter 13
The purpose of Chapter 7 and Chapter 13 bankruptcy differs in their approach to debt relief. Chapter 7 is a liquidation bankruptcy, designed to provide a fresh start by discharging most unsecured debts after a trustee liquidates non-exempt assets. Chapter 13, conversely, is a reorganization bankruptcy, enabling debtors to retain assets while repaying debts over an extended period through a court-approved plan.
Regarding asset handling, Chapter 7 involves the potential sale of non-exempt property by a trustee to pay creditors. In contrast, Chapter 13 allows debtors to keep all their property, provided they make the required payments under their repayment plan. Eligibility criteria also vary. Chapter 7 requires debtors to pass a means test, ensuring their income is below a certain threshold or that they lack disposable income to repay debts. Chapter 13 mandates that debtors have a regular and sufficient income to fund a repayment plan, along with adhering to specific debt limits.
The duration of these bankruptcy proceedings differs. Chapter 7 cases are shorter, often concluding within a few months, while Chapter 13 plans span three to five years. The treatment of various debts also highlights their distinctions. Chapter 7 focuses on discharging unsecured debts like credit card balances and medical bills. Chapter 13 manages and cures defaults on secured debts, such as mortgage arrears, and can address certain non-dischargeable debts through the repayment plan, which Chapter 7 generally does not.
Factors Influencing Your Choice
The decision between Chapter 7 and Chapter 13 bankruptcy is shaped by an individual’s financial situation and goals. Income level is a key consideration. If an individual’s income is below the state median and they pass the means test, Chapter 7 may be viable. If their income is too high for Chapter 7 or they have a steady income for repayment, Chapter 13 is more appropriate.
Retaining specific assets also influences the choice. Individuals wishing to keep secured property, such as a home or vehicle, especially if they are behind on payments, often find Chapter 13 more suitable. Chapter 7 may involve the liquidation of non-exempt assets, while Chapter 13 allows for asset retention through the repayment plan.
The type of outstanding debts guides the decision. If the goal is a quick discharge of unsecured debts like credit card balances and medical bills, Chapter 7 can be effective. However, if an individual has substantial non-dischargeable debts, such as tax obligations or mortgage arrears that need restructuring, Chapter 13 provides a framework for managing these. Previous bankruptcy filings can also impact eligibility, as specific waiting periods apply between different chapter filings. Ultimately, the choice depends on whether the debtor’s main objective is swift elimination of unsecured debt or a structured plan to save assets and manage debts over a longer period.