Check out our handy table listing the differences between Chapter 7 and Chapter 13 bankruptcy.
If you aren’t sure how Chapter 7 and Chapter 13 bankruptcy differ, you’re not alone. Here’s how this article can help you learn about each chapter’s benefits.
- Use the handy table below—it highlights key Chapter 7 and Chapter 13 differences.
- Read the brief chapter descriptions for more detailed information and useful source links.
- Check out the frequently asked questions section—you might find the answer there.
If you’re a small business owner, you’ll want to understand how each bankruptcy chapter will affect your company. Find out how to unwind your company or help it thrive by filing either Chapter 7 or Chapter 11 bankruptcy.
Differences Between Chapter 7 and Chapter 13 Bankruptcy
|
Chapter 7 |
Chapter 13 |
|
|
Type of Bankruptcy |
Liquidation |
Reorganization |
|
Who Can File? |
Individuals and Business Entities |
Individuals Only (Including Sole Proprietors) |
|
Eligibility Restrictions |
Disposable Income Must Be Low Enough to Pass the Chapter 7 Means Test |
Cannot Have More Than $419,275 of Unsecured Debt or $1,257,850 of Secured Debt (as of April 2019) |
|
How Long Does It Take to Receive a Discharge? |
Typically Three to Four Months |
Upon Completion of All Plan Payments (Usually Three to Five Years) |
|
What Happens to Property in Bankruptcy? |
Trustee Can Sell All Nonexempt Property to Pay Creditors |
Debtors Keep All Property But Must Pay Unsecured Creditors an Amount Equal to Value of Nonexempt Assets |
|
Allows Removing Unsecured Junior Liens from Real Property Through Lien Stripping? |
No |
Yes (If Requirements Are Satisfied) (Learn about lien stripping.) |
|
Allows Reducing the Principal Loan Balance on Secured Debts? |
Yes but on Tangible Personal Property Only (Learn about redemption.) |
Yes (If Requirements Are Satisfied) (Learn about cramdowns in bankruptcy.) |
|
Benefits |
Allows Debtors to Quickly Discharge Qualifying Debts and Get a Fresh Start |
Allows Debtors to Keep Their Property and Catch Up on Missed Mortgage, Car, and Nondischargeable Priority Debt Payments |
|
Drawbacks |
Trustee Can Sell Nonexempt Property. Does Not Provide a Way to Catch Up on Missed Payments to Avoid Foreclosure or Repossession. |
Must Make Monthly Payments to the Trustee for Three to Five Years. May Have to Pay Back a Portion of General Unsecured Debts. |
How Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy discharges (erases) qualifying debts, such as credit card balances, medical bills, and personal loans, after three to four months. As soon as you file, an order called the “automatic stay” stops most creditors from pursuing collection efforts.
One of the biggest benefits is that you won’t pay back creditors through a repayment plan. Instead, the court appoints a bankruptcy trustee to sell your nonexempt property—property you can’t protect with a bankruptcy exemption—for the benefit of your creditors. You’ll be able to protect most household belongings. If you don’t have any assets to sell, creditors receive nothing.
As a result, Chapter 7 bankruptcy works well for low-income debtors with little or no assets. But even if you’d lose property, Chapter 7 might still be worthwhile. Just figure out whether the amount of debt you’d erase would exceed the value of the property you’d lose.
Also, losing property isn’t that bad if you have nondischargeable debt, such as child support arrearages or back taxes. In most cases, the trustee will apply the sales proceeds to nondischargeable debt first. After the case ends, the amount you’d owe would be lower.
Not everyone qualifies for Chapter 7 bankruptcy, however. If you make too much money to meet income requirements, explore filing under Chapter 13 bankruptcy.
Chapter 7 Bankruptcy Frequently Asked Questions
- How do I find out whether I’d qualify for Chapter 7 bankruptcy?
- Will I lose property in Chapter 7 bankruptcy?
- Which should I use—Chapter 7 or Chapter 13 bankruptcy?
How do I find out whether I’d qualify for Chapter 7 bankruptcy?
You’ll take the two-part Chapter 7 means test. If your household income is lower than the median household income in your state, you’ll pass. However, if you don’t pass the first part, you’ll have another chance to qualify. The second portion of the means test allows you to subtract some monthly expenses from your income. If you don’t have enough remaining to pay a meaningful amount to creditors through a Chapter 13 repayment plan, you’ll pass.
Will I lose property in Chapter 7 bankruptcy?
Your state decides whether you can use the federal bankruptcy exemptions or state exemption laws. Although exemption laws differ, you’ll typically be able to keep these types of property in bankruptcy:
- Home equity. A “homestead” exemption protects home equity. You can exempt up to $25,150 (as of April 2019) under the federal exemptions. Most states allow debtors to protect some home equity, although a few states don’t have a homestead exemption. Find out more about your home in Chapter 7 bankruptcy.
- Insurance. You usually get to keep the cash value of your policies.
- Retirement plans. ERISA-qualified plans receive protection in bankruptcy. Find out more about your retirement plan.
- Personal property. You'll be able to keep a modest car and most household goods, furniture, furnishings, clothing, appliances, books, and musical instruments. Luxury items aren’t protected, and jewelry may be limited to $1,000 or so. Most states let you keep a vehicle as long as your equity doesn't exceed several thousand dollars. Many states have a "wildcard" exemption you can apply toward any property. Learn more about what happens to your automobile in your car in Chapter 7 bankruptcy.
- Public benefits. Welfare, Social Security benefits, CARES Act payments, unemployment insurance and the like, are protected.
- Tools used on the job. Most states allow filers to keep up to a few thousand dollars worth of the tools used in a trade or profession.
This list represents a snapshot of common exemptions. Many more exist. Check your state exemption laws.
Which should I use—Chapter 7 or Chapter 13 bankruptcy?
Most people who file for bankruptcy choose to use Chapter 7 if they meet the eligibility requirements. Chapter 7 is a popular choice because, unlike Chapter 13, it doesn't require filers to pay back a portion of their debts. Learn when Chapter 7 bankruptcy is a better choice than Chapter 13.
Chapter 13 will make more sense if you’re behind on your mortgage and want to keep your house. You can repay the missed payments over time using the Chapter 13 repayment plan. You can also force a creditor to allow you to repay nondischargeable debts, like back taxes or support arrearages, over three to five years. Find out more about when you’d use Chapter 13 bankruptcy instead of Chapter 7.
How Chapter 13 Bankruptcy Works
Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who have enough left over each month to pay back at least a portion of their debts. The amount you'll repay will depend on how much you earn, the amount and types of debt you owe, and how much property you own.
Typically, Chapter 13 bankruptcy is for debtors who:
- don’t qualify for Chapter 7 but need debt relief to lower credit card payments, stop litigation, prevent a wage garnishment
- have nondischargeable debts such as alimony or child support arrears that they’d like to pay off over three to five years, or
- have fallen behind on a house or car payment and want to get caught up on missed payments and keep the property.
In Chapter 13 bankruptcy, the trustee doesn’t sell your property. However, you must pay creditors an amount equal to the nonexempt property value. In exchange, you pay back all or a portion of your debts through a repayment plan. The amount paid will depend on your income, expenses, and type of debt. Other benefits exist, too, such as the ability to strip wholly unsecured junior liens from your residence.
Chapter 13 Frequently Asked Questions
- How much of my debt will I have to repay if I file for Chapter 13 bankruptcy?
- How long will my repayment plan last if I decide to file for Chapter 13 bankruptcy?
- We're facing foreclosure. If we file for Chapter 13 bankruptcy, can we keep our home?
- My only income is from retirement benefits. Can I use those to fund a Chapter 13 repayment plan?
- I owe back taxes to the IRS—can Chapter 13 bankruptcy help?
How much of my debt will I have to repay if I file for Chapter 13 bankruptcy?
It will depend on the types of debt you have. Here are the general guidelines:
- Bankruptcy fees. You must pay 100% of the bankruptcy filing fees, trustee commissions, and your bankruptcy attorney's fees.
- Priority debts. You must pay 100% of the following obligations: child and spousal support arrears owed to the parent or child; most tax debts except those first due at least three years before your bankruptcy filing; wages, salaries, or commissions you owe to employees up to a specific limit; and contributions owed to an employee benefit fund.
- Secured debts. If you want to keep your home, car, or other secured property, you’ll have to pay 100% of the arrearage amount, 100% of debt secured by a tax lien, and remain current on the monthly payment.
- Unsecured nonpriority debts. You’ll pay anywhere between 0% and 100% of the amount you owe, depending on your disposable income, the length of your repayment plan, and the total value of your nonexempt property (you’ll have to pay for it). Learn more about your obligations under a Chapter 13 bankruptcy plan.
How long will my repayment plan last if I file for Chapter 13 bankruptcy?
If your gross household income exceeds the median yearly income for a household of your size in your state, your plan must last five years—unless you can pay 100% of your unsecured debt in a shorter period. If your income is less than your state’s median yearly income, you can propose a three-year plan. Learn whether you’re eligible for Chapter 13.
We're facing foreclosure. If we file for Chapter 13 bankruptcy, can we keep our home?
Chapter 13 bankruptcy will be a good option if you're trying to save your home from foreclosure. You can pay off a mortgage "arrearage" (late, unpaid payments) over the length of a three- to five-year repayment plan. For this to work, you'll need enough income to meet your current mortgage payment while paying off the arrearage and other required debts.
Once you file your Chapter 13 bankruptcy petition, the "automatic stay" stops foreclosure proceedings until your repayment plan is approved (or rejected) by the court. If approved, the mortgage lender must accept payments towards the arrearage over the length of your repayment period. If you make all the required payments and stay current on your regular monthly mortgage payments, you'll avoid foreclosure and keep your home. Learn more about your home in Chapter 13 bankruptcy.
My only income is from retirement benefits. Can I use those to fund a Chapter 13 repayment plan?
An essential part of a Chapter 13 bankruptcy plan is proving to the judge that you have enough reliable income to meet your payment obligations. Courts allow debtors to use income from many sources to fund their plan, retirement benefit income included. Find out if you’re eligible for Chapter 13 bankruptcy.
I owe back taxes to the IRS—can Chapter 13 bankruptcy help?
Yes. Although you must repay 100% of your tax debt (unless it qualifies for discharge because of its age), you can do so over three to five years. Learn about other reasons to use Chapter 13 bankruptcy instead of Chapter 7 bankruptcy.
Need More Bankruptcy Help?
If you’d like resources to help you navigate the filing process, try How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Cara O’Neill (Nolo).
Updated January 11, 2021
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