How Is Chapter 13 Bankruptcy Different From Chapter 7?

Bankruptcy offers a legal process for individuals facing significant financial challenges, providing a pathway to a fresh financial start. It allows for addressing overwhelming debt by either liquidating assets to pay creditors or establishing a manageable repayment plan. Different types of bankruptcy are available under U.S. law, each tailored to specific financial situations and goals, balancing the interests of debtors and creditors through a court-supervised process.

Eligibility Requirements and Core Function

Chapter 7 bankruptcy is available to individuals with limited disposable income and non-exempt assets. Eligibility is determined by the “means test,” which compares a debtor’s current monthly income to the median income for a household of the same size in their state. If income falls below this median, they typically qualify; otherwise, further calculations assess their ability to pay debts. Individuals who have received a Chapter 7 discharge within the last eight years, or a Chapter 13 discharge within the last six years, might face restrictions on filing again.

Chapter 7 is a “liquidation bankruptcy,” where a trustee may sell non-exempt assets to distribute proceeds among creditors. It discharges most unsecured debts quickly, often within a few months, eliminating obligations like credit card debt and medical bills. This option suits those without significant non-exempt property and little ability to repay debts.

Chapter 13 bankruptcy is for individuals with a regular income who can repay some or all debts through a structured plan. Debtors must have stable income sufficient to make plan payments. There are also specific limits on secured and unsecured debt. The unsecured debt limit is around $465,275, and the secured debt limit around $1,395,875.

Chapter 13 is a “reorganization” or “wage earner’s” bankruptcy, allowing debtors to retain assets while repaying a portion of debts through a court-approved plan. It enables debtors to catch up on missed payments for secured debts, like mortgages or car loans, and pay down unsecured debts over a three to five-year period. This provides protection from creditors while the debtor works towards financial stability and keeps their property.

Managing Assets and Debts

In Chapter 7, the concept of bankruptcy exemptions is central to determining which assets a debtor can protect. Federal law provides a set of exemptions, and many states offer their own exemption schemes, which debtors can often choose between. Common exemptions include a portion of equity in a primary residence (homestead exemption), a certain value in a vehicle, and personal property like household goods, clothing, and tools of trade.

Any assets not covered by these exemptions are considered “non-exempt” and may be liquidated by a court-appointed trustee to pay creditors. For example, if a debtor owns a second home or valuable collections not protected by an exemption, these assets could be sold. The proceeds from such sales are then distributed among unsecured creditors.

In Chapter 13, debtors typically retain all their assets, both exempt and non-exempt. The value of these assets must be accounted for in the repayment plan, as the “best interests of creditors” test mandates that unsecured creditors receive at least as much through the Chapter 13 plan as they would have received if the debtor had filed for Chapter 7.

For unsecured debts like credit card balances, medical bills, and personal loans, Chapter 7 provides immediate discharge. Chapter 13 involves partial repayment through the plan, with the remaining balance discharged upon successful completion. The percentage of unsecured debt repaid depends on the debtor’s income, expenses, and the value of non-exempt assets.

Secured debts, such as mortgages and car loans, are handled differently. In Chapter 7, debtors can reaffirm the debt, surrender the property, or redeem it by paying its fair market value. Chapter 13 offers more flexibility, allowing debtors to cure defaults on mortgages over time within the repayment plan, or reduce the principal balance on certain secured personal property loans (“cramdown”) if specific conditions are met. This enables debtors to restructure payments and potentially keep valuable assets.

Certain debts are generally non-dischargeable in both chapters, including most student loan obligations, recent tax debts, child support, and alimony payments. Chapter 13 offers a “super discharge” benefit, where some debts not dischargeable in Chapter 7, such as those from fraud or willful injury to property, might be discharged upon successful plan completion.

Repayment Obligations and Discharge Outcomes

For most individuals filing for Chapter 7 bankruptcy, there is typically no ongoing repayment plan. Once the initial paperwork is filed and any non-exempt assets are liquidated by the trustee, the process moves relatively quickly toward debt discharge. The focus is on a swift resolution, allowing for a quick elimination of eligible debts.

In contrast, Chapter 13 bankruptcy mandates a detailed repayment plan that typically spans a duration of three to five years. If a debtor’s current monthly income is below the state median for a household of the same size, the plan duration is usually three years, unless the court approves a longer period for cause. If the income is above the median, the plan must generally be five years in length. The debtor proposes this plan to the court, outlining how they will repay various debts, including priority debts like certain taxes and child support, secured debt arrears, and a percentage of unsecured debts.

The court reviews the proposed plan during a confirmation hearing, and if it meets legal requirements and is feasible, the plan is confirmed. Once confirmed, the debtor makes regular, typically monthly, payments to a bankruptcy trustee. The trustee then disburses these funds to the creditors according to the terms of the confirmed plan. This structured payment schedule provides a disciplined approach to debt repayment under court supervision, offering protection from collection efforts as long as payments are made as agreed.

Discharge in Chapter 7 bankruptcy occurs relatively quickly, usually within a few months after the case is filed. Eligible debts are typically discharged approximately four to six months after the initial filing, once the trustee has completed their administrative duties, such as reviewing claims and liquidating any non-exempt assets. This rapid discharge provides a prompt fresh start, freeing the debtor from most of their pre-petition financial obligations. The speed of discharge is a primary appeal of Chapter 7 for many debtors.

For Chapter 13, discharge occurs only after the successful completion of all payments under the confirmed repayment plan. This means a debtor must consistently make payments for the entire three to five-year duration of the plan. Once all payments are made and the plan is completed, the remaining eligible debts are discharged. This longer timeline provides an opportunity to restructure debts and protect assets, but requires a sustained commitment to financial discipline. The “super discharge” benefit of Chapter 13 means certain debts not dischargeable in Chapter 7, such as some debts arising from fraud, can be discharged upon plan completion, offering broader relief.