Chapter 7 vs Chapter 13 Bankruptcy: Which One Fits Your Situation?
This guide is general information, not legal advice. Laws differ from state to state and change over time. For advice about your situation, talk to a licensed lawyer in your state.
If your debts have become unmanageable, bankruptcy can give you a fresh start. Most individuals file under one of two chapters of the federal Bankruptcy Code: Chapter 7 or Chapter 13. They work very differently, and the right choice depends on your income, your property and your goals.
Chapter 7: liquidation
Chapter 7 is often called “liquidation” or a “fresh start” bankruptcy. A court-appointed trustee can sell property that is not protected by exemptions and use the money to pay creditors. In practice, many people who file Chapter 7 keep most or all of their property because state or federal exemptions protect it.
- How long it takes: usually about four to six months from filing to discharge.
- What it does: wipes out (discharges) many unsecured debts, such as credit cards, medical bills and personal loans.
- Who qualifies: you must pass the “means test,” which compares your income to the median income in your state for a household of your size.
Chapter 13: repayment plan
Chapter 13 lets people with regular income keep their property and repay some or all of their debts through a court-approved plan.
- How long it takes: the plan lasts three to five years.
- What it does: lets you catch up on missed mortgage or car payments over time, which can stop a foreclosure or repossession. Remaining eligible debts are discharged at the end of the plan.
- Who qualifies: you need regular income, and your debts must be below certain limits set by law.
Side-by-side comparison
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Typical length | About 4 to 6 months | 3 to 5 years |
| Income test | Must pass the means test | Must have regular income |
| Keeping your home | Possible if you are current on payments and equity is protected | Designed to help you catch up on missed payments |
| Non-exempt property | May be sold by the trustee | Usually kept; paid for through the plan |
| On your credit report | Up to 10 years | Up to 7 years |
What bankruptcy usually does not erase
Some debts generally survive either type of bankruptcy, including:
- Most student loans (unless you prove “undue hardship,” which is difficult)
- Child support and alimony
- Most recent tax debts
- Court fines and criminal restitution
- Debts from injuries caused while driving under the influence
The automatic stay
As soon as you file under either chapter, an “automatic stay” goes into effect. It generally stops most collection actions, including lawsuits, wage garnishments, foreclosure sales and collection calls, while your case is pending.
Before you file
- You must complete a credit counseling course from an approved provider before filing, and a debtor education course before your debts are discharged.
- Do not move money or property to friends or family, run up new credit card debt, or pay back favored creditors right before filing. These actions can cause serious problems in your case.
- Gather your recent pay stubs, tax returns, bank statements and a list of all debts and assets.
Should you hire a bankruptcy lawyer?
You can file on your own, but bankruptcy has strict rules and paperwork, and mistakes can cost you property or even get your case dismissed. A bankruptcy lawyer can tell you whether you qualify for Chapter 7, which exemptions protect your property, and whether there are alternatives such as debt negotiation. Many offer a free consultation and charge a flat fee for Chapter 7 cases.
Find a Bankruptcy lawyer near you
Browse Bankruptcy lawyers on NearLawyers, or choose your state to see lawyers grouped by city. You can also search by legal issue and location from the home page. Searching and contacting lawyers through NearLawyers is free.
